GE: Disaster for Retirement Funds

Written By Briton Ryle

Posted November 15, 2017

General Electric has blown a massive hole in people’s retirement plans. It is a complete and unmitigated disaster. 

The stock was down another 6% yesterday, falling below $18 after it announced it was cutting its dividend in half. 

Back in the spring, GE shares were over $30, as the company was telling investors it would make around $1.70 a share this year. But on its earnings conference call last month, GE lowered those earnings estimates to… $1.05.

Sheesh, that’s bad. And it gets worse. On Monday, GE laid out its turnaround plan. Sell stuff, cut costs, cut the dividend, blah, blah, blah — analysts were not impressed. They’ve been issuing “sell” ratings as fast as they can. Well, not everybody… Citi is calling the shares a “buy” for some inexplicable reason.

I guess maybe Citi and anyone listening to its calls is buying some of Fidelity’s GE stock. Fidelity has dumped 25% of its GE stock. Since July, it’s sold nearly 30 million shares of GE stock. In September, Fidelity still owned 93 million shares (down from 122 million). But I bet dollars to donuts it’s sold more since that disastrous earnings report. 

Now, Fidelity is mostly a mutual fund company. Which means those 93 million shares of GE are sitting in funds that individual investors like you and me buy to save for retirement. I have to give Fidelity a little credit here. GE’s dividend cut was the worst-kept secret on Wall Street, and Fidelity did the right thing by lightening up. 

Fidelity will be saving its investors from some of the GE pain. But not all of it. GE shares could be dead money for years. 

And this is a prime example of a really big problem with index funds and ETFs. Index funds and ETFs simply try to replicate a certain index or sector and thereby hopefully deliver the gains of that index or sector to you. So if you buy a Dow Industrials index fund, you own GE, like it or not. And, what’s more, so long as GE is in the Dow, it’s going to stay in that fund, too. 

The Dow changes its makeup once a year. Index funds and ETFs might rebalance a handful of times a year. But they are NOT going to be proactive about dumping crappy stocks. Plus, they may sit on the losers for a while before rebalancing time comes around.

The Problem with Vanguard

Vanguard is the biggest fund company out there, with $4.4 trillion under management. Vanguard’s founder, John Bogle, had a great idea a few decades ago. Instead of charging investors 2% to cover bloated fund managers’ salaries, why not charge a fraction of that and just replicate the S&P 500 in a fund? 

It’s a way better idea than giving up 2% of your money very single year, that’s for sure. And when the market is rallying, the Vanguard S&P 500 Index Fund will beat pretty much every fund manager out there over time. It’s going to be interesting to see how Vanguard and other index funds do when the market goes south. 

Consider that Vanguard is the biggest owner of GE in the world. Nearly 7% of GE’s shares sit in Vanguard funds. If you have a 401(k) account, there’s a pretty good chance that you own some GE shares.

Now, here’s the thing: Vanguard can’t be proactive like Fidelity. Vanguard has to keep its 600 million(!) GE shares in its index funds. And, in fact, Vanguard still has GE rated as a buy. I wonder if that has anything to do with the fact that the former CEO for Vanguard is now Chairman of the GE Board of Directors…

So when the market does go south, Vanguard won’t be able to sell stock to avoid losses. But it will have to sell stock if its customers start pulling their money out of the market. And it won’t just be selling losers and adding to the winners, either. Because of the way index funds work, they will have to maintain the same percentage allocation to each stock in the fund. So when redemptions start, Vanguard will have to sell equal amounts of every stock, throwing the babies out with the bathwater and perhaps exaggerating a market decline. 

But that’s not the biggest reason I worry about how big Vanguard has gotten…

What You Should Know About GE

The biggest problem with Vanguard is that the company doesn’t *do* macro research. If we start seeing signs of recession, Vanguard has to sit tight. If war breaks out in the Middle East, it can’t load up on oil stocks. Vanguard has to follow its benchmarks. The ultimate copycat…

And I think Vanguard is missing a very big warning sign right now. It has to do with GE…

In GE’s third-quarter earnings statement, it posted $0.29 a share in earnings, when analysts were expecting $0.49. That’s pretty bad. But the reason for the miss is something to really pay attention to.

From a CNBC article, we learn: 

GE’s performance was weighed down heavily by its power business, which saw profits decline 51 percent to $611 million, from $1.3 billion at the same time last year.

The company also posted a loss at its oil and gas business. It swung to a loss of $36 million from a profit of $353 million a year ago.

How GE could miss the ramp up in drilling over the last year is remarkable. Maybe that’s why GE plans to sell its oil and gas business. 

GE is keeping the power business, which it considers a core business. Now, the power business is about electrical power generation. It makes gas turbines for power plants and related software and services. It’s done very well as utilities shifted from coal to natural gas. But you gotta wonder why this division did so badly last quarter…

Actually, I know why. There’s a really big problem in the electricity market. GE hasn’t identified it. Neither have most investors. But this problem is going to lead to a very popular group of stocks getting crushed. You think the GE decline was bad? Just wait. GE is just the canary in the coalmine. When this group of stocks starts dropping, it will likely signal the end of this bull market.

I’ve got a special presentation coming out next week where I’ll identify the bad news for this group of stocks. And I’ll also tell you how you can both protect yourself and profit from this inevitable trend.

In the meantime, you can learn more about the dangers that threaten your retirement in our recent Investing After Hours podcast.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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