June 16th, 2008

GM and GE: Financial Falling Knives

When Anonymous wrote saying “You haven’t done it yet but you have to do something on GE and GM”, I thought it would be an opportunity to write something about downside momentum because it is a two-way street.

There’s a reason why I hadn’t about these two firms before. It’s because there’s nothing in their performance to recommend those two stocks (unless you get a thrill in taking a bumpy ride down — shorting, that is). And the outlook continues to look more dismal every day.

GE: For those who have been in a cave for the past 10-20 years and don’t know, GE has transformed themselves from a manufacturing and services firm into one of the country’s largest financial institutions. According to Wikipedia:

GE Capital was at one time the financial services unit of General Electric and was headed by a single person. The unit, later split into four divisions, is responsible for a large portion of GE revenue. Each of the businesses that were a part of GE Capital are now run independently and role up only to the Chairman of GE, Jeff Immelt. The company has been reorganized into different components:

  • GE Commercial Finance – Servicing the needs of Businesses from local stores to the Fortune 500 elite
  • GE Consumer Finance – Servicing the needs of Consumers through Private Label credit cards and other services.
  • GE Equipment Services – which includes TIP and Penske Truck Leasing

Other businesses formerly considered to be a part of GE Capital, such as Healthcare Finance, Railcar Finance, etc. were incorporated into the corresponding Industrial Businesses as support functions.

The stock’s performance ever since Jack Welch’s retirement (was it coincidental or did he know something) in 2001 has been nothing short of a disaster and looks almost identical to tech mega-cap stocks like MSFT, CSCO and INTC.

There’s no other way to look at a graph of GE’s stock than through a telephoto lens:

After losing 60% of its value during the tech bubble crash, GE was able to crawl back to 50-60% or its pre-crash (pre-Immelt) peak in a five-year, converging and upward sloping channel. But with this past December-January melt-down, GE broke through the lower boundary of that channel and has been plunging ever since.

Bad news for GE-lovers (please don’t tell me about its 4.1% divident yield), according to traditional charting principals, the channel represents a consolidation half-way in the total decline. Therefore, the move preceding the channel (from 60 to 22, or 63%) will be matched by an equal percentage move after the channel (from 41 to 15) in about the same amount of time, or by 2009.

GM:You might say that GM is a little better picture than GE because it’s further along in its imploding process:

Not only does GM have a non-competitive auto business but it also has a remaining 49% stake in GMAC (GM Acceptance Corp.). During March and April, GM sold interest in GMAC and GM Realty to a variety of hedge funds for significant sums. It didn’t seem to help since the stock has tumbled another 25% since those sales.

As the GE case, GM peaked with the bursting of the tech bubble and has been in free-fall ever since; it is now 17% of its peak price, or a decline of 83% for the math-challenged. Has it gone as far down as it can? There is always bankruptcy (again, don’t tell me about their 6.2% dividend).

I may be mistaken, a dead-cat bounce from here to it’s pre-credit crises peak of 38 would be a double but, to me, I think I’d rather take my chances at the poker table in Vegas, at least I have a better idea of what my odds are there.

Subscribe below or click here to learn more about help for navigating turbulent markets.