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General Electric

The most disappointing stock traded today, that is GE.

I have been so, so wrong on GE all of 2009. It has become a favorite short of the hedge funds and the primary short sellers that they are driving down the price in spite of the fundamentals.

GE contends that the book value for its various industrial companies is $8 per share. That values GE Capital at $0 per share. GE Capital: (1) is profitable; (2) is leveraged at 6X (way less than most banks); and (3) has very little mark-to-market problems based upon GAAP accounting rules. This comes from their CFO being interviewed on TV today. When asked if there were any hidden bombs in their balance sheet, he said no.

So, what do we do with all of the GE stock we are holding? As most know, I've been a buyer as the price has fallen based upon GE Managements statements that they would not be cutting the dividend in 2009 (turns out to be false) and that they have no hidden bombs (so far its true).

Earnings projections for GE Capital are for net income of $5 billion in 2009 after income of $9 Billion 2008. GE has its funding under control and does not anticipate any liquidity issues for GE Capital. GE is well into its financial restructuring plan which shows every sign of working.

The big problem as I see it is one of trust: do we trust the management of GE? They promised no dividend cut in 2009, then they cut it. They issued earnings guidance, then missed that guidance. They state that their debt used to fund GE Capital is under control but its public knowledge they have $133 billion due to mature in 2009. Its long-term debt is $523 billion, which is a fairly daunting number to deal with depending upon the length of the recession. Plus, if there are some significant intangible assets on GE's balance sheet, like goodwill, that are accounting entries and not tangible assets.

So, where does that leave us? We have a company with a book value of at least $8 per share (and very likely much more given that GE Capital probably is not worth $0 since it earns $5 Billion this year) trading a bit over $7 per share.

As you can see from the chart above, the volatility is extreme. Yesterday could be a true capitulation day for the stock. You have the very high volume selloff that took shares below $6 during the day, but closed well above the lows. You have the Relative Strength and Stochastics showing the stock is severely oversold and due for a rally.

My view is that GE has a world recognized franchise and several businesses that are operating at or above expectations. Several of the businesses are in sectors or areas that will benefit greatly from the coming recovery. GE will execute its restructuring plan for GE Capital and bring it back to good health. The stock will move back up to the $10 level and eventually trade in the $10 to $15 range for an extended period.

The shorts will continue to try to push the GE shares down, and we will be buyers averaging down our cost basis. As the share price moves into trading range, we will pare back our GE exposure and allocate the proceeds into one of our favorite theme areas.

So, that's the analysis and the plan. I am looking for the trading range to come into play in the second half of the year, but we could see a rally up to the $9.60 level in coming weeks.

Mark