GE Affirmation of Economic Recovery?

GE is no affirmation of the economic recovery and policy success; or at least we hope it isn’t.

Friday started off positive. Futures were up because of GE. The financial stations and pundits were gushing over GE beating earnings for a change. It has been a long time since GE posted positive revenues   that is top-line growth that everyone is looking at as well as solid bottom-line growth. There was ebullient talk of GE confirming the economic recovery. They said its earnings were an affirmation of the policies at hand. Please.

I want to look at what has really happened with GE. It did manage to start the market higher on Friday. Futures were up on NASDAQ, SP500, and the DJ30 where GE resides. Those large cap NYSE indices managed to hold gains on the day, but I want to take a deeper look at GE and see if this is really an affirmation of the economic recovery and a harbinger for economic progress in the United States. If that is the case, then we are in for trouble. GE is not a growth company. Before the stimulus bill was passed, GE was struggling and looking for some way to make its model work. All of its divisions were losing. Though a lot of people cannot stand Jeff Immelt and the company was foundering under his leadership, he did find a way to turn it around.

Just as the government uses a crisis to turn things its way, GE’s Immelt used the economic crisis. GE Capital made it a financial institution, so it was able to get funds. More than that, it was lobbying the Obama administration directly. It was almost sad to see the CEO of a once proud and great company acting as the lapdog for Obama during the administration’s discussions on how to stimulate the economy. Jeff Immelt was everywhere that Obama was. It is like the old joke: If Obama turned the corner too sharply, Immelt’s nose might have broken off. There was a lot of kissing going on, and I am not talking about on the lips.

Without getting too vulgar, GE had to have green jobs, and it saw a way in this President and administration with its pie-in-the-sky views on making green energy a reality   even though, economically, it is not. Immelt saw that as their salvation, and GE pushed these green programs. It is the contractor and direct beneficiary of billions of stimulus dollars for so-called green projects. These projects could not have made it without government subsidy. GE could not make a go of them   it tried and failed. It knew it needed a handout, and it took the money with every hand it had, grabbing fistfuls of dollars (apologies to Clint Eastwood) and using it to build green industries in its company. It is working for GE.

It is similar to the banks making money because the Fed loans it to them for nothing. Then they can put together bond deals for 3-5% guaranteed income. GE was getting its money for free, being subsidized for these projects. That is how it was able to turn things around and actually post profits. Anyone could do that with free money, though. If you do not have to work for it or pay interest on it, that is great seed money.

Is that the kind of harbinger you want for the economy ahead? Will it sustain us if the government provides the money? Of course not. We are already in massive debt, and we cannot sustain this. The economy has to grow on its own. We need businesses that are in business because there is a demand for them, not because the government pays them money to get involved in these endeavors. It cannot last.

If GE is the harbinger of the future, we are in trouble. China will trample us under its hooves because it is in business for business’ sake; in other words, profit. It wants to improve its country, and it knows the way to do it is through entrepreneurship and letting the small businesses make their moves. That will create jobs and prosperity. GE has been a net jobs loser for over 15 years. Even with the new green industries taking off, it has been shedding jobs. That is not the model that we want for our country. It has never been the model for success. 75% or more of the jobs come from small business. These companies start up, create new technologies and new ideas, and then they grow like crazy to produce millions of jobs. It happened in the 1980′s and 1990′s. We had incentives for people to start companies and try new things, and it worked.

Maybe the Obama administration is getting the idea. The talk of lowering the corporate tax rate and the new credits for investment and research may actually help. We will have to see. Regardless, GE is certainly not the example that we want to hold out as the future of our economy. But, as usual, I digress. I am very passionate about this, but there is a very good reason that we do not want to hold GE up as a success story. It really is not, even with the catchy Alan Jackson commercials that show a bunch of GE workers line dancing.

What we saw on Friday was very telling. One of the reasons GE maybe significant (but it would not be significant in itself) is that more rotation is ongoing. There was rotation back into large tech just a few weeks back, but it is turning back around as quickly as it came up. AAPL is heading to the downside. DELL is getting sold back down after rallying. CSCO rallied higher, sold off, and now it has having struggling again. Some stocks are doing well in tech, but they are not the large ones.

What companies are doing better? You have to look at which indices are holding up. SP500 and the DJ30 are holding up. UTX broke to a new rally high on Friday. MMM is breaking to the upside as well. Some of the old, staid stocks of yesteryear that are no longer growth companies are making moves to the upside. We saw this right before the 2007-2008 crash. Those old-economy companies were suddenly driving a lot of the action because of the growth overseas in China, India, and Brazil. They needed the old-style products that these companies produced in order to build the infrastructure and build out their countries. These stocks were acting like growth stocks again.

The economy moved higher, but it was not the growth we normally had that created new technologies. We relied on paper profits and commodity prices rising in order to make our supposed economic growth. It ended poorly. The US is at its best when creating new technologies and new methodologies for making products. We come up with either new products and new technologies or we come up with new ways to do something that has been done one way for decades. We do not do very well when we simply ride the wave of consumption by other nations, and we need to consider that. Our President and his administration want to make our country an exporting country. They want us to be a country that fuels the goods that other countries use as they grow and create new technologies. That is backwards.

We have always been the country that creates the technologies that other countries use. That increases our wealth and standard of living, and we then buy the other products to fuel our standard of living that other countries produce. Do we really want to say that we are no longer a leading country? If we look at the GE model as a success story, then we are indeed going to have serious problems. We may already see it showing up in the dollar.

MONDAY

Economic data is starting back up. Case-Shiller and Consumer Confidence on Tuesday. Wednesday we will actually have a two-day FOMC rate decision. I do not expect many changes there. The interesting part will be how many dissenters there are with the economic improvement that appears to be here. There is economic improvement, it is a question of how strong it will be. It has probably been the weakest recovery we have ever had outside of the Great Depression. Given the action of the small caps and the market indices, there is a question as to where we are exactly with respect to the recovery.

Everyone is so excited on ALL the financial stations. I have guys who are always bears who are talking about things being beautiful right now. They say we will only go up, up, up, in 2011. It sounds just like the home builders did in May of 2005 when that market topped. It does give me pause when everyone is so confident about the future.

New home sales are out and initial claims. There are durable orders, pending home sales, and the GDP for Q4 on Friday as well as the Michigan Sentiment. That is a lot of good stuff, but it all comes down to earnings right now and technical action. A lot more earnings are coming out. The problem is SP600 and NASDAQ have rolled over on the earnings while the SP500 and the Dow continue to move higher on earnings. Houses divided do not stand for very long, and it will be interesting to see where they go.

You know where I stand. I think this is Novemberesque action. That does not mean the market will crash, but it means that it will likely correct. Ultimately when this thing winds down, it might not end up very well. That is down the road, however, and I do not want to talk about down the road right now. I want to talk about what to expect in the near term.

We have been taking money off the table. It looks like SP500 is having some issues; it is churning, and showing the same action it did in November. We will look for downside plays if we can find any decent ones on the SP500 stocks. The financials look too strong, but there are other areas that we might be able to mine for some downside, including some of the indices. If the SP500 is actually showing what it did in November, then it is going to come back more toward the 50 day EMA. We can make money on index plays using that theory.

There will also be upside because the semiconductors are still holding up quite well. We started putting some of them on the report on Thursday as they were coming back to near support and holding. We will continue to look for those. This will be a situation where you look for stocks that are holding up well. You buy into those that do when they bounce and the market comes back. Those are your leaders. Those have the money and are holding up because no one wants to sell them. That means there will be good demand for them and the prices are going to rise when things improve.

We have some possibilities to the downside. We will also be looking for possibilities and opportunities to the upside just as we saw in November. This is still just an early-stage run in the breakout of a longer-term base. That means there will be money flowing back into these stocks, and we want to be there when it does. We have been protecting our downside and taking the position that it is better to save the profit now in case things get uglier than anticipated. We can always buy back in. You just have to keep that mantra going. Protect what you have made and take advantage of opportunity when it arises. You stay ahead of the market that way. You keep building those brokerage accounts, and that is the name of the game. Get that risk/reward right, and then ride it for all its worth. That is another way of saying “let our winners run.” If it doesn’t work, kill it.

We have had some great runs in 2010 and into 2011 and some new plays as well. Some of those are flagging now because there is rotation. We will look to where the money is rotating. We will look for a pullback possibly from some NYSE large caps if they follow NASDAQ and the SP600 lower in a temporary correction. Then we will seek opportunity back to the upside because I feel this run will continue. There is still money coming into the economy, and the Fed is still willing to push it into the economy.

Jon Johnson