InvictusRose

General Electric: Genuine Risk of Collapse?

There's a whole lot of misinformation on this blog, and little of it is coming from the author of the article. I have been playing the stock market since April of 1982 and have rarely heard such emotional baloney being passed for real analysis in my life. As I write this, GE has just broken through the $15 mark and heading for who knows where?

While the author has no position in the stock, he is constantly being accused of trying to get people to short the stock, as if he'd somehow benefit from the transaction. Meanwhile, people who clearly have a vested interest, via their 401K's or mutual funds, to see the stock go higher, are the main people doing the accusing. A bigger bunch of hypocrites would be hard to find.

There are a million comments here and it's impossible to address all of them, but here are some of the main issues that most seem to be missing:

Simply because a stock has been around for along time, is no reason to believe that it will always be around. Anyone proposing otherwise is worse than an idiot and deserves to lose every dime they invest.

Diversification is not always a good thing. In the stock and financial world we are currently experiencing, diversification merely means that you get to lose money in a whole host of industries rather than just losing money in one industry. It does not spread your risk, it simply increases it across a broader range of industries, since the baby is being thrown out with the bathwater. Just as the old chestnut, "a high tide floats all boats," so the opposite is true in bad times. Right now, there is no place to hide. Every investment is losing money, including pure cash accounts which are paying less than the rate of inflation.

Owning GE stock since Immelt took over was as good an investment as putting your money in a piggy bank paying nothing. The stock has been virtually stagnant during one of the most vital times in stock investing history. Anyone who couldn't make money in since 2001, shouldn't be investing or running any company. In fact, he shouldn't be allowed to breed for fear another generation of managerial nitwits will be allowed to pass on his techniques. The issue of whether Jack Welsh is better or worse is silly, at best. He at least made money when there was money to be made.

If you think that simply stating that Warren Buffet invested in the stock and that's good enough for you, then you are brain-dead. Buffet has made his mistakes over the years, and I'd be willing to bet that this is going to be one of them. But even Buffet, who must have had extensive access to GE's books before handing them money, attached onerous conditions to the loan. A 10% interest, rights to buy warrants below what was then market, and let's not forget that he bought Preferred shares, which gives him priority rights in any liquidation (something none of us could get). Anyone who interprets Buffet's actions as acts of faith and belief in management or the company, isn't paying attention.

LIkewise, if you think that stock dilution is a good thing, or putting up divisions for sale for which your name has become synonymous during one of the worst market conditions ever seen, is a good thing, then you'd probably do as "good" a job as Immelt in running that company into the ground. Who's shopping for an appliance division during a housing crisis? Sheesh. And no one but the author sees that as an act of desperation?

As for the so-called "safe" dividend--Let's see, they're paying 10% to Buffet, close to 8% to the common shareholder, and they're carrying nearly $5.5 billion in debt. Yesterday, they announced the recall of nearly 500,000 wall ovens due to a fire hazard. Uh, sure, you go ahead and count on that dividend. Insiders sure aren't counting on it. Total insider ownership is .06%, and that counts Immelt's going on a buying spree since Feb. 08 giving him about 1.6 million shares. But guess what? The reason they think he's the kiss of death, is because he'd been catching a falling knife. Of the 1.6 million shares. only 50K have been bought below a price below $26.42. So much for the boss having an idea about where his own business is going.

I could go on and on, literally forever. But the dreamers on this blog will just go on and on believing whatever they want because they have to. They have money on the long side. This may be the dumbest and most biased group of investors I have ever had the displeasure of reading in all my investing years. Perhaps only AAPL has more Kool-Aid drinkers in their group,.

Someone, please, for the sake of your family, please learn to read a stock chart or buy a book on investing. Emotion is your enemy here, not the author.

Fundamental Valuation: How Low Could We Go?

Caltorguy,

You're right--kinda, sorta.

1. You just forgot to deduct the rate of inflation at the time to find out what your "real" rate of return was on that 15% GIC you quote, which ended up yielding 4.17%. That's a decent return, but nothing like you're trying to make it appear. Also, the only reason they were paying those rates at all, was because 1982 was the worst year of recession we'd had in modern times. We'd also come off of several years of double digit inflation and the rates you mentioned were available because they were treating yields with the expectation that inflation was here to stay for awhile. Note on the following chart that, while inflation sank like a stone after Paul Volker intentionally brought on a recession by raising Fed rates. The following year of 1983 brought an even lower real yield to GIC's, even though the rate of inflation was cut in half. Here's the link to the information: www.assante.com/adviso...
2. You may also have forgotten that people DID buy stocks in 1982. In fact, August of 1982 was exactly the moment when the current bull market started with an explosion in prices that hasn't stopped yet, and which brought us to these still amazing heights of today, even discounting the recent crash. NYSE trading day volumes prior to that, were measured in the single digit millions. There was no automatic monthly contributions into retirement plans and funds around to artificially prop up prices on stocks, as we have today. There was no government intervention artificially manipulating which assets got favored treatment, and no bank was all that large. In fact, one of the reasons that they justified deregulating the banking industry was because America's banks weren't very large when compared to the rest of the world and therefore, unable to compete (at least that's what the argument was). I think the largest American bank at the time was only about 36th in the world at the time. The Glass-Steagall Act was repealed in 1999 and set the stage for the banking system we have today. More on Glass-Steagall: www.investopedia.com/a...
3. It was the fact that, while inflation had been roaring during the later part of the 1970's and early 1980's, tripling the price of nearly everything, the stock market remained stagnant and moribund, trading within an incredibly narrow range for at least a decade. But it was precisely because at some point the stock market needed to adjust itself to the reality of the effects of years of inflation, that the market was able to take off in August of that year. The Dow was below 800 in April of 1982. Merely adjusting it for the rate of inflation at the time, brought it's true value, without raising the PE of any stock, to about 2,400. Getting into the market at that time was as close to a sure thing as we've ever had up to that point.
If you can find it in a library, check out the book, "The Roaring 80's On Wall Street," which was published well before the market took off in mid-1982 and predicted almost exactly what occurred in the stock market.
4. It helps to quote things in context.

Fundamental Valuation: How Low Could We Go?

Thanks, private trader. The answer to your question is that I can't really answer your question specifically. I have land myself, but I intend to build a house on it, not as an investment, but as the last place I intend to live, so it doesn't qualify as an asset class.

In general though, you'd have to know your time horizon for buying and selling, the location of the property (especially its proximity to water o some other desirable location), what constitutes a decent profit in your mind even before you buy, what occupies the surrounding property, zoning laws, neighbors and neighborhoods, deed restrictions, utilities to the property, whether it is within the city limits, cost of developing the property for anyone who buys it from you, proximity to utilities and whether they are above ground or below, septic or city sewer, whether upscale or downscale developments are on the planning board nearby, taxes, and a lot more I'm leaving out. Generally speaking, I think I read that real estate has historically, over time, returned about 10% a year. I don't know if that applies to raw land or not.

Personally, I think that it's a bit premature in the cycle to buy land for investment purchases. I'd think the next year will see prices go lower still and make sellers more willing to make better deals. Many areas of the country have hardly been affected at all by the downturn in real estate, despite what you read in the papers. You'd have to judge your own area to know about that. Also, you should be aware that some real estate interest rates are rising, if you intend to finance the purchase, which will cut into your total profit.

As for the poster who wondered whether those of us on the cautious side of this discussion, were out of the market in Oct. 2007. I can only speak for myself and say that I was definitely out. I know you won't believe that, but I've spent 26 years reading, learning, getting my butt kicked and learning to watch for clear signals when caution is called for. The nationalization of Fannie Mae and Freddie Mac was a hanging curve just waiting to be hit out of the park. Once that conclusion was reached, it was almost too simple to extropolate from that point on, what would happen to the stock market, real estate prices, interest rates, and almost everything else that is taking place at the moment. The only real surprise, is that the people at the helm seemed so shocked at what was so clearly obvious to anyone paying half-attention to the market (both real estate and stocks).

You can tell me I'm full of baloney. It won't change the facts. I actually gave up on boards like this a long time ago because, in the end, people always believe what makes them feel good, instead of looking at things objectively.

For instance, being bullish simply because I am not, is actually not as foolish as it may sound to some. There are many contrarian theories that would support your belief. The trouble you face at the moment is that, not only is there no consensus of where the market is going, but there is no overwhelming concensus one way or the other about how this so-called "bailout" will affect the market. In fact, if there is a concensus at all, judging by the talking heads on tv, it's that this entire market crash has been one giant buying opportunity.

But the point really is, that a bailout of this magnitude has never been tried before, so anyone who tells you positively that they can predict its outcome, is pretty much full of it. And contrarian theories only work when the sentiment is almost all one way and almost none the other way. You're not a contrarian if you are simply in the majority. You'd have to be in the overwhelming majority for the theory to work. Those opportunities only come around a few times in an entire lifetime.

Right now, there is an more an absence of sentiment than any firm one in either direction. People are taking money out of the market, not as a way of demonstrating that they are bearish necessarily, but because they simply don't know what else to do. No one wants to be the last one to the fire exit in a fire. I think that interpreting caution as bearishness is a mistake. Few of us think the market won't come back, or the U.S.A. is going away, or that problems won't get solved eventually. The question you have to ask yourself is this, "Do you want your money at risk while they work out the kinks?"

So far, most of the solutions seem rather ad hoc from where I sit, changing day to day, moment to moment with little in the way of a real, long-range plan. Besides, the simple truth, is that they are doing exactly what they should not be doing, as I tried to explain in a different post. So, who wants to bet on the outcome? It could work, I guess. They're certainly throwing enough money at the problems. "Never fight the Fed," they say. In this case, betting against the market is like fighting the combined monetary might of all the central banks. It's actually a bit scary to be on my side of the bet. But they've put the fox in charge of the henhouse, and frankly, I feel pretty good in insured CD's and MMF's. I'm losing money to inflation. But better that, then losing it to the idiots in charge.

As to the question of whether a person should sell their stocks now if they have already taken that 41% hit, then the answer is a resounding "NO." Why bother? In for a penny, in for a pound. It's completely correct to believe that you might as well hang in there if you've already taken a beating. Once you sell, the losses are locked in. Staying in stocks at least gives you the opportunity to come back.

But saying that doesn't mean that everyone stood there like a deer caught in headlights when the train came roaring down the tracks. My brother-in-law has hundreds of thousands of dollars in his 401K plan and yet he pretty much has refused to spend any time learning about the market and what makes the whole thing tick. I find that incomprehensible. It's easier and whole lot less work for him to fax me his statement and ask me what I think he ought to do. He's probably spent more time learning how his jet skis work, than he's spent learning how not to lose his entire nest egg.

From my experience, judging by the actions of family and friends, my brother-in-law is not that much different than most people. About once or twice a year, they glance at their 401K statement, make a guess or two about which direction they think the market is headed, change their mutual fund allocation based on nothing more than what they heard at the water cooler, and then go about their business.

What is surprising is that you think it's just so much baloney when someone says that they watch this stuff closely and, once you get your butt kicked a time or two, it's not so difficult to figure it out. But the market and mutual funds thrive because people are either too lazy or too disinterested to spend the time it takes to learn some basic lessons about stock market investing.

So most 401K investors cross their fingers, pray for the best, and try their darndest to believe that they know as much as others who've dedicated a good portion of their lives to learning something more about investing, beyond how to sign a form putting them in a mutual fund. Then, if and when the market turns against them, they complain because the person they abrogated their responsibilities to, didn't know any more than they did.

Best of luck to all.

Fundamental Valuation: How Low Could We Go?

gunsandgold,

Sorry, I know I said I'm outta here, but I can't let this go unchallenged. You are perfectly correct in assuming that money will seek a level of return better than "sitting in cash," because cash in "not a good investment." However, I'd take issue with a couple of assumptions you've made.

As I said in an earlier post, you, along with so many others, make the assumption that money can't be lost simply because there is so much of it seeking a higher return. That is just not true. Your seeming belief that there is a finite amount of money chasing a finite amount of return, is just plain wrong. If it were true, some people would have been getting 41% richer while an equal amount of other people were getting 41% poorer as the market sank. Read this link for a better explanation than I could give: www.commercialappeal.c.../

The money that has been lost in the stock market so far, is lost. Period. No one else got it. It's not that someone else got rich because others got poor. It is not a zero sum game. The "money" never existed in the first place, because it was never actually money at all. Instead, it was the perception that a given asset was worth a given price at a given place in time. Absent the perception, the asset fell, and the "money" backing the higher price, went into the abyss. It's gone. Period.

Also, the stock market is not the only asset class that people can invest in. They could start a small business, buy a home, buy gold or other commodities, put money in CD's, or any number of things that don't directly relate to buying shares of stock.

It's getting a little tiresome hearing the same old song about people getting out of the market being somehow wrong because they are just making the problem worse, as if protecting your assets, your family, your retirement, and your hard-earned money is somehow unpatriotic or something similar. We are somehow "making matters worse."

In fact, it is just the opposite. It is the free expression of doubt, disbelief, and horror at the way our government, our financial establishment, our banks, our regulators, et al, took us all for granted and spent our money like drunken sailors and now want us to bail them out of the mess they made, when they would never do the same for us. Sometimes one must take a little pain in order to avoid a lot of it later on. These latest government actions only prolong the inevitable. What idiot could ever think that borrowing more money solves a debt problem? We might be able to save our way out of it, but I don't think it's possible to borrow from ourselves, in order to make the debt good. That's like taking a dollar bill from your right pocket and putting it into your left and making some big deal about the transfer of money.

This is the first time in my life that I can remember idiocy, deceit, bad management, corruption, poor policy, bad law and ever other kind of bad thing, being rescued, rewarded and put , not just on a par with those of us who have always tried to do the right thing, but put above us as a class.

Bad businesses are supposed to fail. Bad loans are supposed to be punished. Bad decisions are not supposed to be rewarded. Bad laws and policies are not supposed to be continued and extended. Bad banks should fail. It is not the law of the jungle. It is the law of good business. It is the aim of America. Socialism failed exactly because it failed to reward good behavior and subsidized outmoded, outdated and irrelevant industry. Even China is practicing capitalism in the marketplace. That's why we owe them so much money. They're actually doing a better job at practicing capitalism than we are here at home.

Not to beat a dead horse, but what if the government decided that that fictional guy who delivered ice to your grandparents was in a business of "national importance," and was worthy of government assistance and subsidies so he could stay in business? Only the wealthy and ruling class would have refrigerators and ice would be a subsidized asset class. But your iceman, just like today's modern farmer who gets paid NOT to grow crops, would still be in the same business and the country would be worse off for the help we gave the iceman.

You may, of course, believe anything you wish. But I would suggest that it is financial suicide to believe that simply because so many people WANT a return on their money, that the market is somehow obliged to give it to them. Nothing could be further from the truth.

Best of luck.


The argument that money sitting on the sidelines can't or won't stay there forever simply because there is no other choice for it, suggests that you believe that it will therefore force the market to either make up for past losses or never lose it again. That argument holds no water. It is fallacious in the extreme.

Fundamental Valuation: How Low Could We Go?

I actually hadn't thought I was being pessimistic. Realistic and honest, maybe. Trying to use some hindsight and history to put this thing into some perspective. The references to 1982 was exactly a way to point out how much things have changed, not as a way to predict the future. That said, I'd argue that putting your money into a mutual fund in a 401K to be run by strangers who charge fees for underperforming the market, IS being a Polyanna. For all intents and purposes, it demonstrates a real belief that nothing can go wrong, that the long term and near-constant thrust of the market is always upward and that it is as near to a "sure thing" as one can get. That simply is not true. It IS true that over very long periods of time, you'd make money. But that would depend on your age, when you bought into the market, how much of your money was in the market, if your timing put you in before a top or before a bottom, and on and on and on.

It's also very true that things move a lot faster now. But that cuts both ways. You could be back to 14,000 on the Dow in the next two weeks. I'd be the last one to say it can't happen. But neither can anyone say that it will. That's why it's called "a market" and not a "sure thing." I'd only suggest that, because it is a market, then it must, by definition, have it's good times and bad times. Otherwise, it is some kind of creation I have never heard of. Ask the people who bought homes two years ago, if the housing "market" was a sure thing or if it has its ups and downs. Ask them how long it will be before they break even. That's not doom and gloom. That's reality. Plain and simple. No one is trying to burst anyone else's bubble, but simply saying that the 40% drop we just experienced might have taken ten years in the 80's, does not negate the fact that it couldn't take ten years to get those numbers back up, computers or automatic garage door openers aside.

Change is the only constant. No Cold War? Okay, then how about a couple of hot wars in Iraq and Afghanistan eating hundreds of billions of dollars like we invented the printing press? You don't see any upside or downsides to that? Because I don't see the point of the argument. Change isn't always good. Ask any dinosaur. Or the guy who used to deliver ice to your grandparents. Or the casket maker if war is good business.

Good luck. I think I've worn out my welcome.

Fundamental Valuation: How Low Could We Go?

E Nuff Sed,

It has always been said of gold, that its price never changes. Ever. What changes is the currency and emotion surrounding the commodity. A theoretical ounce of gold would buy an equivalent amount of goods a thousand years ago as it buys today if there were equivalents--A good donkey then, an iPod now. Gold is a reflection of the world around it, not the other way around. If you can accept that premise, you will see that there is no "real" price of gold relative to any artificially created commodity such as treasuries or dollars or euros or anything else created by man to take the place of something with real intrinsic value, such as gold or silver. That's partly why gold rises as tensions and uncertainty rise. Treasuries merely reflect people's belief at that moment in time, and in the government that issues them. Otherwise they are as worthless as any other piece of paper with ink printing on them.

There is, however, a simple and overlooked solution to this "credit crisis." That is to make the interest on all savings tax-free. Doing so would encourage saving by raising the effective yield each bank pays. By law, banks can lend out $10 for every dollar they take in in savings. They can do this over and over again each time that same dollar is borrowed and then deposited again. That's one major reason why some mortgage lenders have found themselves leveraged 30:1. This simple and very basic solution would encourage savings, flood the banks with money to lend, thereby lowering interest rates and freeing up the credit crunch that the government created by encouraging debt and discouraging savings. With banks flush with cash and looking for places to invest it, they could again invest in homes, small and large business, business creation, community improvement, infrastructure, etc. And it can do it without confiscating wealth or redistributing it.

America today has about the lowest savings rate of any industrialized nation. No one tells you what you must do with your money, but our government does have a huge say via laws, rules and regulations, in how or what monetary behavior it encourages or discourages. A Roth IRA is a one prime example of what people do with their money when they are not taxed on their retirement savings. Unfortunately, it also encourages investments in mutual funds run by people who can rarely beat even the S&P averages.

Conversely, allowing you to sell your house tax free every two years constitutes the other end of the spectrum. That particular tax code encourages people to bet and speculate on real estate, selling often in the hope that their home price will appreciate in the next two or three years for them to sell and pocket the profit. Encouraging debt is how the mortgage mess happened. The government took an asset that older people used to almost never count as a financial tool (it was just their home--cheaper than renting, interest being tax deductible, and a sort of forced savings). But it was never really what they thought of as an "investment." When they changed the law, they changed the outlook and the rules of the game (much to the country's long-term detriment, in my view).

Anyway, that's my point of view. It too, is worth the bandwidth it's written on.

Thanks for your kind words, prudentinvestor. Best of luck to all.

It's my opinion that the reason the government has never taken this most obvious step, considering that they are constantly complaining about how little Americans save, is because it would remove money from asset classes favored by those that benefit from other asset classes--those in power and those with lots of wealth.

Fundamental Valuation: How Low Could We Go?

Muzie,

It's easy to understand your frustration. But stating a fact is simply that, nothing more or less. The market is what it is at any given moment. The plain truth of it, is that if it weren't for the fact that people allocate money to automatic monthly deductions to 401K and similar plans with little thought to where it goes and how it's invested, this market likely would have tanked years ago. Most mutual funds are required by their charters to be almost fully invested in the asset class it specializes in, and to have a given amount invested in that group of stocks at any point in time, which causes them to buy more in low price times and less in higher priced times. Barring massive redemption requests from investors, it amounts to dollar cost averaging on a much more massive scale than we can manage individually.

The problem now, as you correctly identify, is that there are massive redemptions by investors and the asset class is falling of its own weight. The beast feeds on itself and no one knows when or at what point it will stop. You are also correct to assume that at some point the bleeding will stop and people will discover that no bank is paying them enough to even keep up with the rate of inflation. You are losing money even in the best CD's at the safest banks. So, once things settle down again, people will creep out of their little cubby holes and tell their asset manager to put them back into the market.

One thing you might remember, is that the value of stocks, despite the various ways we use to measure their value (PE, P/S, P/B, etc) are only worth what we think they are worth. They have no real intrinsic value outside the value of their plant and equipment at an auction. That was why I used Yahoo as an example of just one stock that people still believed held some value, even in the face of quite a bit of evidence to the contrary. It's worth what investors say it's worth.

It's great when you buy Apple before anyone else feels they are worth something more. But it also works against you when people panic. When they want out, there's little you can do to convince them that the company has intrinsic value. It's only worth what their fears and dreams say it's worth. It's always been that way. Has the value of GE, GM, IBM, Apple, AT&T, or any other company whose price has been cut in half or more in about a month, actually occurred because that company is no longer worth what it was only a few weeks ago? Of course not. It's only that investors have lost the belief, if perhaps only temporarily, that the future is limitless.

We live in a world that is interconnected. The housing mess brought on the banking mess, the banking mess brought on the lending crisis, the lending mess brought on the foreclosure or rescue of other messes and on and on. Then the government stepped in and really screwed the pooch.

The mortgage appointment I made only a week ago has seen the mortgage rate rise about 7/8's of a point. Why? Because the government nationalized Fannie Mae and Freddie Mac and now the market is selling their bonds at fire sale prices because no one believes in them anymore. Bond prices go in the opposite direction of bond yields and so, the interest rate has risen like a rocket in response to the Law of Unintended Consequences. The government tried to help save the mess it started in the first place, and only made things worse.

If you think this is the end of the mess, then I would have to disagree. We haven't even heard much from the rest of the world yet. There's more and worse to come and it is simply a case of, "Sometimes you eat the bear, and sometimes he eats you." The poster who advised you that sometimes the best thing to do is to do nothing, is completely on target. This market tanking, for anyone paying attention, was pretty easy to see coming. If you listened, you could hear the desperation in their voices, every time a talking head or congressperson told you the system was completely solvent. You know what? When something is really working well, there's never any need to reassure people that it's working well. When you see Nancy Pelosi, Harry Reid, George Bush, Barney Frank, Ben Bernake, et al, posing for pictures together with the caption saying essentially, "Hi! We're from the government and we're here to help!" Hold onto your wallet.

The good news? This too shall pass.

Best of luck.

Fundamental Valuation: How Low Could We Go?

I agree with most of what you say. I began investing in 1982 with a Dow below 800 just before it took off in August of that year. It had lingered there for about a decade.

So, perhaps a little perspective on things might help. When I started out, it was considered wild speculation to buy a stock with a PE above 8 and a P/S ratio above 1. Those valuations belonged to only the very best companies available. You'd be hard pressed to find anything selling at those ratios today.

Things have certainly changed and I've made a lot of money because they have over the years. But the question at hand deals with how low the market can go, and less forthrightly, are we there yet?

Well, let's take for example, a widely-traded and particularly unspectacular stock like Yahoo (YHOO). It produces nothing proprietary that another company could not do as well or as cheaply. In fact, it offers no real "product" per se at all. It pays no dividend, and it completely dependent on advertising from companies that will almost certainly cut their budgets in any coming slump.

Yet, despite it's current price being far less than half of what it sold for in the last 52 weeks (-56.5%), it still carries a PE near 18, a forward PE over 24, a P/S of 2.5, and a book value that values the company at below its current cost at $8.4. There's more if you look, but those are the highlights. finance.yahoo.com/q/ks...

I could do this all day with most exchange traded companies, including REITS (who says the real estate market is in bad shape?), consumer computer companies that make products that people can and will live without when given the choice of food on the table, gas in the car, roof over their head, or the coolest cell phone on the market.

So, can the market go lower? Of course it can. Can it stay lower for a very long time? Certainly. It has. It did. And furthermore, it's long overdue for a long, long sleepy time.

As long is everyone is quoting old chestnuts about "buying when blood is running in the streets," remember another old chestnut: "When nearly everyone bets one way, go the other." Right now, the so-called "smart" money is telling everyone that we must be near a bottom and should be loading up on stocks. And that includes Warren Buffet. I'd call it a market bottom too, if I could invest in Preferred Shares paying a 10% dividend, along with the right to options at current prices, at some point in the future when the stock is likely to be higher. That's a sweetheart deal we'll never see. So Buffet has a motive for seeing you throw in with him. Only you won't get his deal or his return.

Good luck to all.