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General Electric: Too Big to NOT Fail

2 | By Shah Gilani

You may remember the first verse of Blood, Sweat & Tears’ 1968 hit song “Spinning Wheel”:

What goes up must come down
Spinnin’ wheel got to go ’round
Talkin’ ’bout your troubles it’s a cryin’ sin
Ride a painted pony let the spinnin’ wheel spin

Those lyrics also tell the story of how the once-mighty General Electric (NYSE:GE) was managed and what happened to its stock.

What investors missed about GE is with all its spinnin’ going on, it became too big to not fail.

This is the true story of what really happened to the 126-year old company started by famed inventor Thomas Edison and industrialist banker J.P. Morgan.

It’s a long one, so I’m dividing this into two parts – one today, and one on Friday.

Let’s jump right in…

“What Goes Up Must Come Down”

General Electric, founded in 1892, was once the poster child for a “widow’s and orphan’s” stock.

For a period of over 70 years GE’s go-to, steady-Eddie stock raised its dividend and wasn’t prone to price swings, and the company achieved a market valuation of $594 billion on August 28, 2000.

General Electric’s stock was a prolific climber. So much so that, rather than let the stock price soar into the stratosphere as some modern companies do, GE split its stock multiple times.

The value of the shares a person owns doesn’t change when a stock “splits,” they just own twice as many shares at half the former price if, for example, a 2 for 1 split is enacted.

Then, if the stock price goes higher, say back to where it was before the split, an investor with twice as many shares at the new old high price has doubled their wealth.

GE first split its stock 4:1 in 1926. It split it again 4:1 in 1930.

As the stock started rocketing higher in the late twentieth century, GE split 2:1 in June of 1971, it split 2:1 again in June of 1983, 2:1 again in May 1987, 2:1 again in 1994, 2:1 again in May 1997, and finally 3:1 in May of 2000.

[URGENT] Critical: Ex-Cold War spy leaks assassination details

If you had bought shares of GE a long time ago, by the time the stock got back up above $60 in August of 2000, and you owned a boatload of shares, you were a very well off investor.

The push higher for the stock in the modern era started when Jack Welch was named CEO in 1981.

John Francis Welch Jr. joined GE in 1960 as an engineer and rose through the ranks to run GE’s famed plastics division.

Before Welch re-made the company, it was known worldwide for its plastics, power, chemicals, aviation, lighting, and other consumer products divisions.

Jack Welch, besides becoming revered for his management style, turned General Electric into one of the top players in aviation, healthcare, power, renewable energy, digital, additives, venture capital and finance, entertainment, transportation, and oil and gas.

When Welch retired in 2001, GE was one of the biggest companies in the world and one of the most revered.

“Talkin’ ‘Bout Your Troubles It’s a Cryin’ Sin”

But, a company the size of GE, as spread out as it was, as gigantic as its divisions were, would always run into some troubles.

For the most part, Jack Welch was a brilliant fixer. Maybe too much of a fixer.

The stock rose regularly along with GE’s earnings. Even when there were difficulties in divisions, GE almost magically, always met or beat analysts’ consensus earnings estimates.

That’s where the fixin’ came in.

I followed GE from my early days in the business, starting in 1981. And I came to appreciate and revere Jack Welch for his boldness, innovation, willingness to go big, and especially ramping up GE Capital.

By the time I was running a trading desk in New York in 1987, Welch’s GE had bought old-line investment bank and trading shop, Kidder Peabody. It was Kidder Peabody, in their full-on, grow-at-all-costs mandate from headquarters, that came up with “portfolio insurance.”

Portfolio insurance caused the Black Monday crash on October 19, 1987.

From then on, I viewed GE as something else. To me, it had lost control of its divisions in its drive to become the biggest player in every business they entered and competed in.

Through the 1990s, I was repeatedly surprised at how GE was able to consistently meet or beat (often by a penny or two in bad quarters) its own earnings projections and analysts’ estimates.

Magic? No.

Spinnin’.

[CRUCIAL] CRAZY – that’s the only word I can use to describe this: he hasn’t lost on a single recommendation!

It’s hard enough for a company with one product, many products, even a line of interconnected businesses, to be able to project to within a penny or two what it was going to earn almost every quarter. GE was doing that by “managing” its earnings.

I knew the game had gone too far when GE Capital became the biggest moneymaking division of GE, and still, earnings came into line every quarter.

That’s impossible for any bank or finance company to do, even when that’s all they do.

How could GE, with all the swings in the bond markets, mortgage markets, stock markets, commodity markets, derivatives markets, and its lighting, aviation, power, healthcare, oil and gas, and every other giant division, spit out earnings like clockwork every single quarter?

My fear is that the spinnin’ wheel was a painted pony – not a real workhorse – exploded in 2008.

How to Trade GE Now

GE is not a stock to buy-and-hold. Not by a longshot.

With a stock that’s staggering and stumbling like GE, it might sound contradictory to say that you can make money on them just as easily as you can a soaring stock.

But, that’s not the case.

Companies that are on the verge of collapse, or are already there, are my favorites. Because as crappy as they are at making money for themselves, that’s how good they can be at making money for readers of my elite research service, Zenith Trading Circle.

We use something we call “carbon trading” to target the worst stocks on the market, and snare some of the best profit potential. Most investors aren’t even looking at the companies we target – which is great news for us.

And every week, I send a new recommendation based on the carbon trading technique. Because once I give my readers the chance to profit off this or that garbage company, we can go back in and do it again and again.

I’m not just blowing steam, either – this year alone Zenith readers have had the chance to grab: 100% gains on the first half of an EAT recommendation and 71.43% on the other half; 100% gains on the first half of a FIT recommendation, and 100% on the first half and 20% on the second half of a DDS recommendation.

And that’s just naming a fraction of the profit opportunities this year.

If you want to see how we do it, just click here for more information.

I’ll be back with you for the conclusion of GE’s story on Friday.

Sincerely,

Shah

2 Responses to General Electric: Too Big to NOT Fail

  1. Warren Drye says:

    GE: As the # 1 District Sales Engineer in USA, 33 yrs retiree of RCA)12 teck., 23 sales. I agree with part of your analogy but not all. I was selected as I of 3 to represent RCA to GE in 87 when they bought RCA. I retired in 89 with severance. I saw “Handwriting on wall”. I am buying GE fast as I can under $8.00 bought 1000 Mon. last buy was $12.97 SEE YOU ON wall st.

  2. Jaime says:

    Shah
    You’ve commented on GE’s “Earmings Management”. For the uninitiated “Earnings Management” is code for cooking the books. This can be accomplished many ways, but the most common technique is thru the setting up of “Cookie Jar Reserves”. This usually involves playing with inventory reserves, overaccrueing expenses, playing with depreciation reserves, and other areas.

    I worked for one of GE’s acquisitions, railcar services, and before GE acquired them, a former collegue described how cookie jar reserves were being set up. This involved the sale of railcars
    (refirigerator cars, hopper cars, tank cars). Normal GAAP accounting in this situation requires that when a fixed asset is sold, that the cost of the asset (a debit), and the accumulated depreciation on the asset (a credit) be reversed out producing the assets net book value. The difference between the selling price ( a debit) and the net book value (a credit) results in a gain or loss. My collegue
    indicated that railcars were being sold (hundreds) without removing the accumulated depreciation on the cars. leaving a large credit balance on the G/L and Balance Sheet. When the company was not meeting plan in a quarter, that credit balance was slowly moved into income.

    GE’s internal auditors may have found this after the acquisition, Then again with everything Ive heard about Jack Welch, nothing may have been changed. It was a long time ago, but this may have suited GE’s management just fine.

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