There’s nothing like starting your week with a kick to the guts. The Aussie market was doomed before trading began today with Friday’s shock result by General Electric (NYSE:GE) in New York.
General Electric is a world-class jet engine maker. It’s also a shameless money-lender.
General Electric’s commercial finance business in Australia has a much higher profile than its business in the States, which goes under a different name altogether But the company’s dirty little secret is getting out: it’s really a financial company masquerading as an industrial.
The company generated huge earnings during the credit boom as a commercial lender, not an industrial manufacturer. General Electric reported a double digit decline in first quarter earnings, and promptly blamed the whole thing on Bear Stearns. But if General Electric’s CEO Jeffrey Immelt were being candid with investors, he would admit that the problem isn’t with Bear Stearns, but in the performance of General Electric’s financial segments. Don’t take out word for it. Look below.
GE Summary of Operating Segments (unaudited)
Source: Edgar Online
You can see that General Electric’s two big financial segments, Commercial Finance and GE Money, showed a twenty per cent and a nineteen per cent decline in profit in the first quarter, respectively. Earnings in the infrastructure business were actually up.
General Electric used to be company that made money by making things. Now it’s a company that loses money by lending money. It’s a pretty good symbol for much of what’s wrong about American capitalism. The truth is, it should probably be two companies, not one.
But it’s the collapse of yet another Australian broker, Lift Capital and its 1,600 clients, which threatens to swamp the Aussie market this week.
But wait, it’s not just Lift. “The list of stock brokers that have been engulfed by the tumbling stock market may be expanded to a fourth victim with concerns growing about Melbourne stock lender Chimaera Capital,” reports today’s Herald Sun. We are finally learning just how many people bought their way into the boom with borrowed money.
Valuations are out the door for now. If small brokers that offered their clients leverage keep collapsing and liquidating their portfolios, you’d have to be a daredevil or playing with someone else’s money to be a buyer.
It’s not that there’s no value in the market. It’s that there are so many sellers. The trouble is you just don’t know how much more forced selling there’s going to be. With so much stock being dumped on the market, it pays to be very discrete.
Markets and Money