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>>> GE Rout Ambushes Hedge Funds After Second-Quarter Buying Spree


Bloomberg

By Brendan Case

August 16, 2019


https://www.bloomberg.com/news/articles/2019-08-16/ge-rout-ambushes-hedge-funds-after-second-quarter-buying-spree?srnd=premium


Shares dropped most in 11 years after report by Madoff accuser

CEO’s turnaround drive had won over investors during spring

GE plummeted 11% to $8.01 on Thursday, the biggest drop since April 2008.



General Electric Co.’s biggest plunge in 11 years came at an awkward time for some of Wall Street’s savviest investors.

Hedge funds added more shares of GE than any other company to their industrial investments in the second quarter, according to an initial analysis of U.S. regulatory filings compiled by Bloomberg Global Data. Their holdings of the Boston-based company increased by 25% to a total of 199.3 million shares, valued at $2.09 billion at the quarter’s end.

While some recent buyers may have sold since then, many of them were almost certainly left holding the bag when Harry Markopolos, who rose to prominence by blowing the whistle on Bernie Madoff, accused GE of “accounting fraud” Thursday. Markopolos’s report wiped out much of the company’s share gains this year, even as Chief Executive Officer Larry Culp labeled the analysis “market manipulation -- pure and simple.”

The rout highlights the perils in trying to call a bottom to a troubled stock as the company attempts a turnaround from an epic collapse. GE’s market value fell by more than $200 billion in the two years ended Dec. 31 amid weak cash flow, a slump in the power-equipment market and two CEO changes. While Culp vowed to improve financial transparency after taking over in October, Markopolos accused the company of masking tens of billions in liabilities.

GE plummeted 11% to $8.01 on Thursday, the biggest drop since April 2008. That cut this year’s advance to 10%, compared with a 13% gain in an S&P index of industrial stocks. The company is the worst performer on that gauge since the end of the second quarter, with a steady decline since it reported earnings July 31.

GE trails industrial peers after Thursday's plunge

Following the close of Thursday’s trading, GE climbed about 2% after a regulatory disclosure that Culp purchased about $2 million in shares amid the rout. He bought $3 million of stock earlier this week, a move the company said reflects “confidence in GE’s long-term strengths and its progress.”

‘Impending Losses’

Markopolos, who is working with a short seller, took the opposite stance. He said GE will need to increase its insurance reserves for a long-term care portfolio immediately by $18.5 billion in cash -- plus an additional noncash charge of $10.5 billion when new accounting rules take effect. GE also is hiding a loss of more than $9 billion on its holdings in oilfield-services company Baker Hughes, he said.

“These impending losses will destroy GE’s balance sheet, debt ratios and likely also violate debt covenants,” Markopolos said in his report.

GE defended its accounting in a statement by Culp and board member Leslie Seidman, who chairs the audit committee.

“The fact that he wrote a 170-page paper but never talked to company officials goes to show that he is not interested in accurate financial analysis, but solely in generating downward volatility in GE stock so that he and his undisclosed hedge fund partner can personally profit,” Culp said of Markopolos.

Seidman said the analysis included “novel interpretations and downright mistakes” about accounting requirements.

Hedge-Fund Holdings

For the analysis of hedge-fund investments, Bloomberg looked at 824 filings for the second quarter, which showed $1.66 trillion in total stock holdings. Industrial-sector investments accounted for $120.5 billion, or 7.2% of the value of the securities listed in the filings. The firms cut their holdings the most in railroad CSX Corp., which has fallen 17% since the end of the period.

It’s impossible to know which hedge funds may have sold some or all of their GE holdings before Thursday’s rout. The company’s shares were little changed in July before their August decline.

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