Given what one analyst described as a “horror show” in the oil markets, the ghoulish amount of red ink obviously hurts companies like Exxon Mobil (NYSE:XOM) the most. However, this is really a harbinger for the major airlines like United Airlines (NASDAQ:UAL) and Delta Air Lines (NYSE:DAL). Ultimately, this translates to rough waters ahead for General Electric (NYSE:GE). If you haven’t already dumped out of GE stock, I’d seriously consider trimming your exposure on any spike highs.
Now, I understand that the oil futures market has many nuances. While headlines may show WTI dropping below zero, it doesn’t mean you can fill up your car for free. But what this market is telling us is to prepare ourselves for a new paradigm, one that could easily affect GE stock — and not for the better. In fact, the signs were obvious early on with this novel coronavirus outbreak. On March 6, I warned that:
“… the bigger economic threat is that because oil is so ingrained in our societies, it may be a harbinger. While the Dow Jones is down 5.4% for the year, XOM stock is off 24.3%. Unlike the Dow, oil prices don’t have a Fed to mask the demand weakness. As OPEC may soon find out, demand is demand: there’s no way to fake whether people want the product or not.
“Given this new reality that has been thrust upon us, I think the smarter play tactically is to wait. XOM stock looks very ugly from a technical perspective. A little patience to see how this plays out will certainly be better for your blood pressure.”
It’s the same guidance for GE stock and here’s why.
Double-edged Sword Swinging at GE Stock
First and foremost, international tourism will almost surely take a hit. Let me address the low-hanging fruit: no one wants to be around each other. Although completely anecdotal, I believe this is the first time when state and federal government agencies disrupted our personal liberties and a great many acquiesced willingly.
And in this environment, it will be extremely difficult to find people willing to be cramped next to hundreds of others, all breathing the same recycled air.
Therefore, it’s no surprise that United sold 22 planes to Bank of China Aviation under a lease-back program. Additionally, United severely cut back its flights in May, with analysts expected similar cuts for June. Right now, the name of the game is preserving cash.
With airlines slashing their expenses, there’s just no way they would be in the market for buying new engines. Of course, that’s a direct hit to GE stock.
Second, cratering oil prices makes General Electric’s renewable energy business very unattractive. I marveled at the analysts describing the hemorrhaging of the oil sector as if this was a shocking development. When I said investors should ignore the OPEC+ deal, I was firm because the sector deflation was tied to demand, not supply.
Unfortunately for GE stock, with traditional energy sources so dirt cheap, very little if any incentive exists for green energy. Even if society supported renewables for its environmental impact (or lack thereof), there’s no demand.
Because we find ourselves in a brave new world where you can’t give away oil, this signals a demand drought. For GE stock to get out of its jam, two things need to happen: tourists must fly en masse and oil prices must skyrocket to new highs.
Neither are under GE’s control.
Don’t Bank on the Military
As I’m writing this, breaking news indicated that North Korean dictator Kim Jong Un is possibly seriously ill. In response, South Korea’s currency weakened sharply, likely due to implications of massive instability in the Korean peninsula.
If these unconfirmed reports turn out to be false, other geopolitical flashpoints could spark. For instance, oil deflation alone risks volatility in the Middle East as many economies there are tied to oil production.
But if you’re gambling on GE stock as a potential military play, it may be too little, too late for the underlying company. Besides, President Trump ran on the ticket of getting us out of foreign wars started by the political establishment. Getting involved in the near term with far-bloodier conflicts isn’t what his campaign advisers are recommending.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
