Just the Stats Maam. Why GE Is an Example Why Not to Buy and Hold

The primary objective of our research offering is to help investors cut through the myriad of noise percolating through financial markets each week and focus exclusively on the signals, whenever and wherever they may occur, writes Landon Whaley Friday.

To that end, we publish a report each Saturday called “The Weekender” as a complement to our flagship report, Gravitational Edge. The Weekender allows us to provide information we feel is critical to your understanding of markets but its information that doesn’t necessarily fit the design and purpose of Gravitational Edge.

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The “Just the Stats Ma’am” section of The Weekender allows us to discuss the three most critical economic or financial market statistics from the prior week. Without further ado, here are the three most critical stats from the week of October 29, 2018…

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We don’t often talk about junk here, but when we do, we pour on the data. U.S. junk bond yields have risen more than 1.5% over the last 12 months, which means speculative-grade companies are now required to pay almost 30% more in yield to borrow money today than they did to borrow the same money a year ago.

But it’s not just the companies potentially suffering, the actual bonds are behaving like it’s an FG4 environment too. High yield bonds have delivered positive returns during October in every year since 2008. However, that all changed this year when U.S. high yield bonds declined -1.8% last month, making it the second-worst performing bond market index behind only the global high yield index, which lost -1.9%.

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So far in the Q3 earnings season, companies that beat analysts’ expectations have been rewarded with an average loss of -0.5% in the two days before the announcement through the two days after. Companies that missed earnings estimates have been punished with an average loss of -3.5% during that same four-day window.

It’s no surprise that companies who missed were punished, but the fact that beating estimates also gets you a slap across the face tells us that good news is already baked into stock prices. It should be noted that the last two times companies who beat earnings averaged a negative return in that four-day window was Q1 2000 and Q4 2007.

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General Electric (GE) cut its dividend for the second time in less than 12 months, from $0.12 to $0.01. They are paying the 1 penny just so they can say they still pay a dividend. This is only the third dividend cut the company has made since the Great Depression and it will save GE about $3.9B a year.

GE is the poster child of why “buy and hold” is an antiquated notion. First, it’s near impossible to figure out which company will turn out to be Amazon (AMZN) and which will turn out to be Pets.com.

But beyond that, despite three rallies to north of $30 a share, each approximately 10 years apart, GE is currently trading exactly where it was in 1997. If buy and hold means you watch a stock take 20 years to do a round trip that includes three separate drawdowns in excess of -60%, then no thank you!

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Watch Landon Whaley’s 3 Ideas for Investing and the meaning of coddiwomple in a short video here.
Recorded: MoneyShow Dallas Oct. 5, 2018.
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Landon Whaley: We have a generation of investors and asset managers who know only one market. The reality is markets and economies cycle and catch people off guard.
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Duration: 5:51.

Landon Whaley interviews Adrian Manz: How I approach stocks here.
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Landon Whaley interviews trader Jackie Ann Patterson: How I got started trading and how I approach it with my Truth about ETF Rotation here.
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Landon Whaley interviews John Carter: How I started trading here.
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