Will General Electric Doldrums Affect the Market?

General Electric (GE) has long been considered one of the ultimate market bellwethers, with its giant industrial components combined with a massive finance arm. The company has been a Dow Jones Industrial Average component since inception in 1896. GE reported earnings last week and gave a fairly bleak outlook for its various industrial divisions (including broadcasting). Second quarter industrial sales fell 7%, order backlog fell, and the company ratcheted down their expectation of industrial earnings to break-even from a possible $5 billion profit previously. Its GE Capital division did post a profit, but this unit has been a major contributor to the company cutting its dividend and losing its 'AAA' bond rating this year.

GE shares have drastically underperformed the markets in 2009. As you can see in the following chart, GE (yellow) is down about 30% YTD, while the S&P 500 Index (SPX) is up around 5% currently.

GE vs SPX 2009 Performance Chart


The market has basically been "shaking off" the doldrums at GE recently, but has this giant American icon really become insignificant? Let's look back to April 2008. GE shares had a huge gap lower after earnings, one of the biggest single day moves in the stock's history. Remember that GE has a float of over 10 Billion shares and is one of the most widely held stocks in the world, so it takes massive selling to move the stock. The S&P 500 rallied for about a month following this report, until beginning its historic downslide in May 2008 (see the following chart).

Currently, there is a growing discrepancy between GE shares (bottom graph on the following chart) and the S&P 500's recent strength (top graph). Will this performance divergence be "filled in" by the S&P 500 losing value in the coming months? It seems a decent probability at this point.

GE & SPX Daily Charts


This market has been led higher recently primarily by Technology names, as well as some Financials. Industrial stocks have been mixed, and certainly some industrial names have reported healthier numbers than GE did. So perhaps one could say this is a "company specific" problem. But the question remains, can the market shake off the poor outlook and performance from this American icon, or will it have a lagging effect as it did in April 2008? Certainly, the stock has not recently moved as severely lower as it did in April '08, so the reverberations may not be as big this time around -- but it does not bode well most likely, in my analysis.

Disclosure -- I currently have no position or recommendation in GE or the S&P 500 Index, but circumstances can change quickly. Additionally, this article may not constitute the opinion or position on GE or the S&P 500 of other BigTrends portfolio managers.

Comments

[Armen:]

Nothing special about GE anymore.

Jul 21 11:51 AM

[Mrudula Shah:]

To me the charts of both GE and S&P 500 indicate a "hesitant" move for some time (perhaps several weeks at most) followed by upward spikes. Both are just getting ready for a significant jump!!

Jul 21 12:39 PM

[Fighting Yoda:]

GE is still the true bell weather it is industrial, financial- infrastructure, consumer credit, commercial real estate, white goods - all of the above. GE painted a real bad picture - and GE is painting the true picture - not a phony one unlike many others - since GE is so big - it simply can not fire people to do cost cutting and short term profits.

I will ignore likes of caterpillar, Intel etc and only listen to what GE has to say- GE is simply brining bad things to light.

Jul 21 12:52 PM

[doubleguns:]

GE is currently forgoing salary actions in order to keep costs down. There isn't much left to cut.

NBC will continue to lose. No surprise here.
Appliances, not in a housing down turn. No light here.
Transportation- no chance with out consumers buying.
Medical- possibly but how many hospitals are buying expensive equip with Obamacare in the wings.
Aircraft engines, are you kidding. Possibly engine service has a dim light.
Financial- to much eastern Europe exposure plus over all market doing poor.

No its not looking good.

Jul 21 01:08 PM

[Mrudula Shah:]

Well, I do not see that way. Look back and think how bad and depressing the things looked just last March? Three or four months later, the things look much more encouraging. Major banks are stabilized. Yes, the TARP money is being released too slowly, but to do that and releasing the money for inftrastructure projects can not be done without developing plans and letting them out for bids. That consumes time. This is happening all over the world. My guess is that the economy will start improving perceptibly before the year end and GE will be a big beneficiary. No body knows this better than GE management; they just don't want to give optimistic views to the Wall Streeters or the gamblers. Smart ones will read between the lines and would start accumulating.

Jul 21 02:16 PM

[jbonefish:]

GE is disconnected from the market. I like the thesis here but I think the S&P and GE can continue to diverge as long as the uncertainty remains over capitalization of GE Capital and potenial exposure to loan losses as unemployment rises. Others will be effected but as the markets continue to separate winners from losers there will be a theme for the losers ... and GE has all the markings.

Jul 21 08:13 PM

[sethmcs:]

I like GE, it is a dull industrial-bank company that generates cash during the worst panic since 80s. Has a AA credit rating and a diversified bunch of business with the potenial to grow as the economy recovers. Warren Buffet seems to think there is value in GE and so do I. GE is a value play not a growth play. Those who complain the loudest seemed to be growth investors who got burned. Why don't all of you growth guys sell GE go chase the next hot thing and drive the price down to $6. I'll buy more.

Jul 22 12:54 AM

[Mrudula Shah:]

Barclays stated just yesterday that the GE Capital's reserve is insufficient. To-day, GE Capital has been approved by FDIC to exit the government guarrantee program!! How do you trust the credibility of Barclays?? Who paid them to state so? Is this typical of what the crooks at Wall Street do ? Is there any accountability for the companies like Barclays to publish lies so blatantly?

Jul 22 08:38 AM

[HChang:]

Don't believe the analysts, they are paid to write down stocks so that their clients can buy. Trust your own judgement. For me, GE is an indicator of the world economy, which will eventually recover. Go ahead and sell, the lower the better, because I can't wait to pick up more.

Jul 22 09:33 AM

[buoy:]

In a global economy, GE has a huge advantage.

Jul 22 09:37 AM

[Wisdom vs. ...:]

IMO two issues here, 1. GE's share value, which is fair. Cash flow is good, and most of GE's 'debt' is bonds with contracted receivables, not normal operational and capital shortfalls; and, 2. The Economy. No one bought anything for two quarters because the economy was overheated/ overleveraged, but when sales recover they will still be down below 2007 levels. Looks like a genuine contraction until some new small businesses create some real, permanent new jobs.

Jul 22 05:21 PM

[Zeb.:]

I have been riding with GE for many years, and the road and ride has been good and smooth; however, I'll admit, because of the mess that happened on Wall Street, which affected Economy, the ride has been a little bad and rough. But for those who are faithful riders, and has been riding with GE for many years, they know that the road will get smoother with time, and the ride will once again get much better.

Jul 22 11:19 PM

[Avooch:]

Until the situation with GE Capital works itself out, investors will be hesitant to own at high multiples. In addition, GE's books not not considered high quality. Buy Side will always discount any company whose Books are suspect.

Gudovac says GE is a good buy at $6

gudovac1941.blogspot.c...

Jul 24 11:30 AM