General Electric has fallen from grace with the market, and lately, with the SEC as well. They recently paid a $50 million fine to the SEC to settle charges that they had falsified some of their accounting. Of course, GE neither admitted or denied the charges–they just paid.
Floyd Norris, in his High and Low Finance column, wonders whether their accounting problems were an aberration or just standard practice. The accounting issues in question occurred during 2003, although the SEC didn’t get their investigation rolling until 2005. Forensic accountants will have to figure out who knew what when. But if you look at the point & figure relative strength chart of GE versus the market, it went on a sell signal in September 2001. Since that time, the S&P; 500 is up approximately 3%, while GE has lost more than 50% of its value.
This whole debacle points out why we prefer to use price as an input for relative strength, rather than relying solely on fundamental data like many investment management organizations. Fundamental analysts have been working with GE’s financial data for years—and basing investment decisions on it. Unfortunately, the data has now turned out to be false.
