The GE name is up for sale, at least in one of its oldest businesses, the appliance manufacturing business.  GE entered the appliance world in 1907, now 101 years later its looking to auction it off to the highest bidder.  Investors should begin to wonder if this spinoff is directly correlated to its losses with the GE Money bank with is drowning in subprime exposure and is systematically writing down bad debt.

The fact that GE has to even look to sell its appliance business, for whatever reason is a bit alarming.  Though no reason has or probably will ever be stated, GE is looking for $5 to $6 Billion in cash at the auction block to dump what is both an extremely profitable business, and something that has been around for a very long time.  Its refrigerators, stoves, dishwashers down to electric mixers make up a very well known brand.  Surely the buyer is getting a great deal for a company that literally “makes it all.”

General Electric is likely preparing for more writedowns.  This sell off will net the company plenty of instant cash to cover any future writedowns and keep earnings up to a sustainable level.  Keeping shareholders and investors happy is extremely important for GE which has much to lose from its own credit market investments and its bond rating.  If earnings turn sour, one of the world’s largest and longest running corporations will grind to a standstill.

The sale of its appliance business will likely cut heavily into future revenue.  There isn’t much reason to believe that GE has the possibility to create any possible returns from the lump sum of cash, nor does it need to sell units for financing.  There is plenty of available credit to GE which leaves me to believe that the company is preparing for a heavy loss.

No investment here, GE looks worse and worse.  Though it was originally recommended a buy, this selling of assets looks less than appealing for the investor.  Hold out to see what quarterly earnings bring.

GEs report of lower earnings stunned the street but shouldn’t have surprised anyone familiar with the company.  Amongst light bulbs and appliances, GE has a huge credit portfolio from credit cards to car loans and even home loans.  GE money bank is one of the largest in the world and has huge exposure to the subprime industry.

Many store cards meant to be used in only one department store are issued by GEMB.  These cards generally have low limits (as low as $200) and issued to nearly anyone who applies.  Many of these card users are people without the credit to get an all purpose card or those who like to get the benefits of a store card.  Rarely do high credit score borrowers look for these kind of cards as they are known to lower the amounts you get from premium credit card issuers.   It is believed that American Express or other high end offerings don’t like to give cards to people with store card only experience.

While GE does lead the world in many different technologies, namely the compact fluorescent light bulb, the manufacturer has way too much exposure to the financial industry.  When most people think GE they don’t think banking, the stock was able to escape the financial sector bust but now the bill is coming due.

I wouldn’t consider owning GE for a variety of reasons, first and foremost being its exposure to the subprime lending industry.  If we do in fact go into a recessionary period, there are going to be even larger write-offs and lower expectations for the company.

Next is its huge market cap.  Even after shedding 12% of its value in just one day, GE trades at a market cap of $320 Billion.  To make any considerable amount of money, this stock has to build up a lot in equity.  A 10% gain would be a $32 Billion difference, to make 50% we’d have to see an increase in value of $160 billion.  As you can see, its just too hard to sustain such growth, especially when the stock already sells at a PE ratio of 14.   That’s a pretty high value for a company of this size.

In my opinion, GE has a lot more to lose at this point than it stands to gain.  Its likely that the subprime crisis will affect all parts of its business.  Lesser demand for its manufactured goods like refrigerators and air conditioners and failing payments in its credit division makes GE an even worse investment.  The worst part about the situation is that the company likely holds plenty of debt on its own products.

GE is a neither buy or sell at this point.  Economic outlook is rather bleak, so the company is unlikely to rebound any time soon.  Its credit division will certainly continue to take a beating, especially no secured credit cards and other personal loans.  If its manufacturing core does well, it will only help pare losses in the credit market.  No position, even at a 12% discount from yesterday.

Google has been very quick to respond to the overall markets, it seems as though it is easily affected by the market rather than its own inner workings.  The company topped out last November with a share price of $750 only to find itself to be at $430 just four months later.

Prior to the fallout from $750, Google had never managed a significant move down.  A quick look at a Google chart will show that the price has never made significant, quick drops but rather rose at a very linear pace until November, where it began to spike.  This tells us that the spike was due to mal-investment that led to large profit-taking and short selling.  Google’s drop in price has very little to do with the internal workings of Google and more to do with trading.   Traders were quick to drive the price up then back down, something that hadn’t happened in the two years prior.

Now that Google has shed about 40% of its value, this might be the place to buy in.  For the first time, Google trades at just 32 times earnings with a PEG ratio of .61.  It is very rare that you every get into a growing internet company with a 53% growth rate for just 32 times next years earnings.  At this rate, Google is set to reach a blue-chip PE level within the next couple years.

While the world might be entering a recession, internet traffic is not slowing, nor is the need to advertise on the internet.  Google boasts low overhead costs and is very well prepared to continue working even through economic slowdown.  Its ad sense program extends all over the internet and the world, profiting from the day to day currency flux.

Large offers for Yahoo make Google look even more attractive.  Microsoft and Yahoo have yet to even come close to Google in textual advertising.  Yahoo has produced a similar program but has been in beta for two  years while MSNs marketing program never really gained traction.  Google has the key to the text based advertising market and is unlikely to give it up.

All in all, Google looks like a great investment.  A PE ratio of 32 and growth rates in the 50s tell us this is one for the long term.  Look to buy on the dips at this price.

After a rally like we had yesterday, today’s minor sell off could be expected.  A 400 point movement by the Dow is no small figure,  it is likely that today’s drop was led by profit taking.’

Something you’ll hear a lot about is a small movement after a large day.  It is very common that after a large movement up, the market will trade near 0 for the next day.  People buy in and out of large rallies, causing a turbulent day right after.  Yesterday the Dow was up more than 400 points, today it was down 45.

This likely occurs because people place orders for the market open.  Through midday, the market was up 150 points but tapered off as profit-taking started a sell off.  The cash strapped investment banks probably led the decline by selling off large portions of their holdings to raise cash.

The problems with the mortgage industry is causing banks to sell their positions to raise cash.  Visa’s $18 Billion IPO looks more like a sellout rather than a public offering.  The banks are unloading Visa for two reasons, they’re flat broke and Visa is extremely volatile to recession.  The credit card industry is likely to be caught holding the bag on billions in bad debt.  Unsecured loans are often the first loans in default stage, and mortgages one of the last.  If there are 3 million homes in foreclosure, its probable that there are a lot more credit card accounts in the same situation.

Electronic trading should be partly to blame.  The availability of the markets to round the clock orders makes days like this that much more likely.  The quick gains of yesterday are sure to be cashed in, we won’t see a day like that in quite some time.  Some might attribute today’s sell off to worries about inflation.  The market should go up in times of inflation rather than down, so I don’t think that is the case.  The $200 Billion lending package has certainly made a mark on the financial markets however.

Commodities were up on a weakening dollar.  The dollar now trades at 1.55 to the Euro and nearly $1000 for an ounce of gold, and $110 for a barrel of oil.  The FED loan package likely cause the drop in dollar demand and boosted commodity prices.

The non farm payroll report comes out each month on the first Friday of the month.  This report basically shows the number of employed and also unemployed workers that work in fields other than farming, much like the title suggests.  The data does not include government employees, the self employed or employees of nonprofit organizations.  All there of those jobs are highly manipulated by forces other than just simple economic dynamics.

Nonfarming payroll is usually a more economic number than it is a number important to the stock market.  The report greatly affects the currency exchange rates with any pair including the USD.  The forex market will usually go gyrate 50-100 pips before the report is even published due to speculative investment.

The non farm payroll is extremely important because it accounts for 80% of the workers in the United States.  This number is usually the go to number for investments in currencies and commodities but rarely makes its way into the stock markets like it did today.

The Dow was off by some 200 points today after a disappointing non farm payroll statistic that pointed to higher unemployment.  The payrolls were slashed by 63,000 jobs in February which marks an almost guaranteed recession.  Investors are looking for any indication they can to recession, and certainly they responded in that fashion today.  Most months the nonfarm payroll goes virtually unnoticed.  The only market to respond to payroll statistics is generally the currency markets, as payroll statistics are a part of an economic issue rather than a market issue.  Today the situation is different, almost every economic issue is immediately made a market issue which is why we’ve been seeing such high activity.

Stocks surge after news that they will be listed in a new index.  When news breaks that Joe Schmo’s company will now be used in the S&P 500 index, chances are the price is radically affected.

Indices give good feelings.  The idea that a company is good enough to be used as an example gives investors that warm fuzzy feeling inside that the business is thriving.  Being listed in a index gives the idea of stability and confidence that the corporation will succeed.  Investors like to see other investors doing the same thing, when an index picks up a stock you can bet that investors are taking notice and getting in.

The index fund effect is another reason that stock prices boom.  There is billions, if not trillion of dollars in funds meant to mimic the biggest and the smallest of index funds.  These mutual funds carry the same positions and weight as modern indices and charge a modest fee for account management.  These are largely set and forget kind of programs for the manager, who merely copies the holdings of the chosen index.

When a company gets added to an index, the index funds have to automatically adjust to the new corporation.  The fund will shift capital out of the dropped company and place it immediately into the new addition.  This creates a surge in the price of a stock from near overnight demand.  For indices like the S&P500 this is huge news because the amount of funds trying to replicate the results of the index is in the hundreds.  Almost and family of funds will offer an S&P tracking fund meant to trade parallel to the value of the S&P500 itself.

Being a part of an index can hurt a stock as well.  In periods of negative returns, equity is taken out of the market, hurting the indices as a whole.  When things turn sour at XYZ which is listed on the Dow, withdraws likely resulting from negative performance will probably affect the value of ZYX which happens to be an entirely unrelated company.

Getting in an index is paramount to a stock price’s success.  When capital flows into the markets it is often parked in index funds particularly S&P500 funds.  The added demand from institutions means higher stock prices and lower float, ultimately leading to less volatility in the market.

Some corporations give back to their investors in the form of dividends, or a small check as a share of the returns the business made in the last dividend period. Other corporations pay nothing, and some pay very high dividends to investors.

The best dividends usually come from companies that create their own product, make money through interest, or are growing rapidly.  Altria, formerly Phillip Morris, was known for its high dividend payments to investors through the 70s and 80s and is one of the fastest growing corporations ever.  In just 40 years, the stock has gone from 7 cents a share to $70, a huge return.

Financial stocks usually pay good dividends as well.  The constant interest income from their holdings such as mortgages, car loans or investments in other businesses has to be put somewhere.  Often financial companies pay dividends that are as high as some bonds.

The worst dividends usually come from tech and medical companies.  In order to protect their revenue stream, technology and medical fields have to keep producing better and better products.  For pharmaceuticals the rules on patents makes competition fierce.  Most pharmaceuticals companies only have 6-7 years before their top earners start fighting generic competition, dropping sales numbers almost instantly.   Tech companies also spend a lot on research and development in an attempt to create the next big thing.  You can’t sell the same computer for twenty years, people want updates.

Dividends can help you grow your investment much faster.  Some corporations offer dividend reinvestment plans, also known as DRIPs that allow you to automatically roll over your dividend payments into more stock.  Instead of getting a check for your dividend payment, the corporation pays you with more stock or ownership in the company.   It is easy to see how much dividends add up over time.  If a stock grows 10% per year in value and pays a dividend of 4% per year, you’re effectively growing your investment by 14% per year.

$1000 invested at 10% a year for 20 years makes you $6727 but by reinvesting the dividends and earning 14% per year you would have $13743 at the end of the 20 year period.  The difference is about twice the amount of money.

Companies that don’t pay dividends usually grow faster in value than those that do pay dividends because they reinvest back into the business.  If Microsoft paid a bigger dividend, they would have less money to invest in future products and lose future revenue.  Businesses that pay dividends usually grow slower but make up for it in the form of yearly dividend checks.

Dividends are a great way to make more money with your current investments.  Dividend payments may seem small, but when compounded they really add up.

Stocks climbed a bit on Monday and I don’t think that was a shock for most people. We knew that the change in the prime rate was going to impact the financial world across the board and that change did not disappoint. Adding another quarter point to the recent ‘emergency’ rate cut only a few weeks ago dropped the prime rate a full point in total and that rate ripples throughout the marketplace.

The housing industry is still not seeing any major changes, but with time, perhaps we will see stabilization and eventually a climb there as well. The interest rates dropping will eventually affect homebuyers in a positive way, after all. Does that mean that consumers are starting to have a more hopeful outlook?

From everything I can see, it really doesn’t look that way. Now that congress has passed the economic stimulus bill that included the so called “tax rebate” Americans can look forward to an early return on next years taxes. Come May married couples will be getting a check for $1200. Will that really make a big difference in the long term or is it just throwing money down the drain? Most folks I have talked to are planning on paying down bills, rather than spending on new items, so that really isn’t driving the economic engines.

The financial pundits are still uncertain about the eventual outcome and are unwilling to make predictions. President Bush has on the rose colored glasses and sees a sunny future, but I think we all know that his opinion isn’t going to hold much sway over the market.

The value of stocks right now are making them very appealing, and of course, using the dollar cost averaging method of investing, we know that right now is the time to invest. The most value for your dollar awaits you, so dive in and enjoy the potential gains that are in our futures.

We have already told you that: a) we think the market will recover, and b) that the market is down right now is probably a good thing for you, over the long term.

Yet, the media is buzzing with talk of global recession. And do not even get the economist talking…

Of course, as some wag once said, economist have accurately predicted 10 of the last four recessions. After a while, if you repeat something long enough, it becomes true just because enough people believe it and act upon it.

This morning I came across this article from the Wall Street Journal that shows a number of reasons why the economy is actually doing quite well and is nothing you should really be worried about.

I encourage you to read the article for yourself, but here are a few quotes from it that stood out to me:

It is hard to imagine any time in history when such rampant pessimism about the economy has existed with so little evidence of serious trouble.

It is most likely that this recent weakness is a payback for previous strength.

A year ago, most economic data looked much worse than they do today. . . . But the economy came back and roared in the middle of the year.

Because all debt rests on a foundation of real economic activity, and the real economy is still resilient, the current red alert about a crashing house of cards looks like another false alarm.

What do you think? Is the news of recession just so much scare reporting, or does the story have teeth?

As Aleks already pointed out, the last few days have been a bumpy ride. However, smart investors are not scared. Not at all.

The main thing that keeps people from investing in stocks is the volatility. This year your account is up 12%, next year it is down 3%. Unless you are different from every other person I have ever met, realizing your portfolio is down 3% for the year (that you have less money in your account on December 31st than you did on January 1st) is going to bother you… but it shouldn’t.

If you were planning on moving to a new city next year, would you want the cost of housing in that city to go up or down over the next year?

Down, of course. No one wants to spend more than they have to, and we are confident that, over time, the average selling price of house will rise, so it makes sense to get the lowest price possible for the house you are going to buy, right? Right.

However, most investors are upset when the market goes down, despite the fact that they have 25 years or more until retirement and thus are not finished buying stocks yet. Perhaps this is best illustrated by a quick story. I first heard this one from the great broker Nick Murray and it completely changed the way I buy stocks.

The Tuna Fish Story

I like Tuna Fish. A Lot. In fact, I have always liked tuna fish and know that I always will, so I look for sales on tuna fish so I can stock up when the price is low.

Now, in my part of the country, a can of tuna costs about $.75 a can, on average. This morning I open the paper and see that Food Lion has a sale: $.25 a can. Happy Day! I take the truck to Food Lion and buy as many cans as they will let me, because I am buying three cans for what I normally pay for just one can. While I am out, I stop by Kroger and notice that their Tuna is $.80 a can, so I say “no thanks” and keep on going.

You see, I am not through buying tuna fish. I am going to eat tuna fish until the day I die, so it makes sense for me to buy it whenever I can, provided it is a good deal. Being of Scottish ancestry, I pray regularly for good deals.

If the market has a large correction, it is not a disaster. It is not a cause for panic. It is not the end of the world. It is simply a big sale. They happen on average every seven years or so and buying heavily when they happen can give you wealth beyond the dreams of avarice.