On Tuesday, we talked about the first half of General Electric (NYSE:GE)’s story.
If you missed it, click here to catch up.
Today, I’m going to wrap up GE’s story, telling you all the truth about how it got too big to NOT fail.
Then, I’m going to give you a sneak peek into how you can learn how to stake your claim in an industry that’s worth $5.7 trillion a year at least – because you deserve a treat after this.
It’s A Cryin’ Shame
In February 2008, eight months before the financial crisis exploded, the Wall Street Journal reported that General Electric (NYSE:GE) “is expected to make changes to its accounting policies and procedures in an effort to end a long-running Securities and Exchange Commission probe… The formal investigation has prompted GE to twice restate its financial results and to make three disclosures over additional accounting errors since 2005.”
It was eventually determined that much of the earnings Kidder Peabody – the old-line investment bank and trading shop that GE bought and that came up with “portfolio insurance” – had reported were fake and based on fictitious bond trades. GE had to take a noncash write-off of $350 million only two days before its quarterly earnings release date.
In Welch’s autobiography, “Jack, Straight From the Gut,” with co-author John A. Byrne, confirmed what I always knew when he said, “The response of our business leaders to the crisis was typical of the GE culture. Even though the books had closed on the quarter, many immediately offered to pitch in to cover the Kidder gap. Some said they could find an extra $10 million, $20 million, and even $30 million from their businesses to offset the surprise. Though it was too late, their willingness to help was a dramatic contrast to the excuses I had been hearing from the Kidder people.”
That proved what I’d always suspected, but it didn’t matter. The financial crisis laid bare how exposed GE Capital was. And it was the beginning of the end for GE as the world knew it.
Jeffrey Immelt replaced Welch in 2001. Immelt led the company through a restructuring that included the sale of GE Capital – which, at one time, had more than $600 billion in assets, including loans and commercial real estate.
The move took more than three years to complete and magically generated an almost unending number of one-off items for the company to explain in its earnings reports.
Yep, more spinnin’.
GE said it was the main reason for its practice of reporting four different per-share earnings numbers over several quarters.
In January 2018, GE announced a fourth-quarter after-tax charge of $6.2 billion and a $3 billion cash capital contribution to its insurance subsidiary that will expand to $15 billion by 2024. The contribution was necessary after the company discovered liabilities stemming from its long-term-care reinsurance portfolio, which it mostly exited between 2004 and 2006.
As the company unraveled, so did its stock.
GE’s tanking stock price broke an unwritten rule for the Dow: A component’s stock should not be worth less than 10% of the highest-priced stock in the index.
GE stock after being one of the original stocks in Dow Jones Industrials Average, and the longest running component in the index, was recently replaced by Walgreens.
On GE’s latest earnings call, Chief Financial Officer Jamie Miller said problems with the company’s giant, struggling power business “will persist longer and with deeper impact” than initially expected, leading GE to “significantly miss” full-year cash flow and earnings targets, according to a transcript provided by FactSet.
It’s just more of the same.
As GE got too big to not fail and consistently hid its earnings misses at various divisions, its deluded management continued to spin a narrative that investors, too in the dark to understand, didn’t understand, or maybe I should say, didn’t know were fake earnings news.
GE’s stock made a new low this month at $7.72, that’s down 88% from its August 2000 highs. At that low level, it’s down 59% since the beginning of 2018. It’s down 44% since October, just a month ago.
And no one knows where the bodies are all buried.
It’s Not Always What You Know – It’s Whom You Know
GE’s done as dividend payer. It cut its dividend to one penny (which is idiotic) I guess just to say it always pays a dividend.
Sadly, GE’s now just a day-trading stock.
Since its low just the other day, the stock’s up 10% at $8.55. Too bad that’s $0.83.
The company’s capitalization is down to $75 billion from $594 billion, a drop of over $519 billion, wiped out.
GE’s sitting on over $115 billion in debt and has negative earnings growth.
The question facing GE now is survival.
As far as its stock, it’s now the kind of stock I like to day trade. That’s because I can short it and make money, I can buy cheap calls on it and profit if it pops 10% like it just did. In other words, it’s just a toy now.
That’s what happened to General Electric.
But as far as day trading, I can’t see GE gifting anyone boatloads of cash anytime soon. However, there is a $5.7 trillion a year industry that’s poised to dish out huge double- and triple-digit wins: Energy.
Knowing that is great and all, but sometimes that doesn’t cut it. Everyone knows that tech is a great and potentially profitable sector, but that doesn’t mean that you should go and invest in every tech stock you see. A lot of them are losers. That’s why you need a guide.
And when you have an absolute legend on your side, someone who knows the energy industry better than anyone else out there, your profit potential could shoot up.
And one of my friends and colleagues is one of the most powerful people in the energy industry, having access to crucial information that he’s kept locked away for the past 40 years.
But now, he’s ready to share it.