GE Fears Overblown

by Investment U Research Team

An interesting quote came to us today from a Bloomberg article. In discussing the stock weakness of General Electric (NYSE: GE), it highlighted a weakness that’s been seen across the market.

“Creditors are being bailed out everywhere but equity owners are not,” said William Poole, president of the St. Louis Federal Reserve Bank until March 2008. “What that does is create cascading weakness because you can’t raise any equity capital.”

And we have seen countless examples in banks where the government has backed the debt portions of companies. In companies like American International Group (NYSE: AIG), Citigroup (NYSE: C) and General Motors (NYSE: GM), equity ownership has been wiped out or severely curtailed by U.S. Government investments.

This should give some consolation to bondholders everywhere that their principle is being systematically protected, but it also gives us pause to consider equities until we see some leveling off in the market.

Unfortunately, that signal may not show up until the biggest movements have already occurred. And with trillions in cash on the sidelines, it may be soon. So let’s start back at the beginning and the basics of profitable investing. That means earnings.

Surprisingly, as GE has lost $264 billion in market value, it’s racked up its third highest annual profits ever – strong earnings figures that demonstrate GE’s core value. It also leads us to believe that GE is suffering from market worries about its capital division, not its real prospects.

Companies mentioned in this article: GE, AIG, C and GM.

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