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GE Getting Hit Over Regulatory Concerns

Stocks post modest midday rally. Stocks moved up modestly after the open, led by two of the weakest sectors in the past week: financials and commodities.

The markets rallied going into two pieces of economic news at 10 AM ET:

1) The June Philly Fed, while still negative, posted its best numbers since September 2008.

2) May Leading Economic Indicators (LEI) posted its second straight positive numbers … prior to April the numbers had been negative for an entire year.

The bad news is that since the start of the month almost all modest intraday rallies like this have petered out, as demand for stocks has been very weak. Breaking that pattern will be a strong sign that “buy on the dip” has currency.

GE weak on regulatory concerns. Our parent company, General Electric, is down another 2 to 3 percent today after being down 4 percent yesterday. The biggest concern is that GE Capital may be regulated by the Federal Reserve rather than its current regulator, the Office of Thrift Supervision, which is proposed to be merged into the Office of the Comptroller of the Currency (OCC).

There has been speculation that GE Capital could be spun off, which might necessitate significant capital raising.

In a note a short while ago to its clients, Goldman Sachs made the following points:

1) "we believe the ultimate outcome is unlikely to be perilous for GE shares."

2) "A strong GECS is in the best interest of the economic recovery the government is trying to foster and a spin-off would seem to unnecessarily strip GECS of the important support mechanisms (cash flow, tax shield, credit rating) GE Industrial provides."

3) "Ultimately, with GECS capital adequacy and liquidity solid, we see little incentive for the Fed to create a problem for a key member of the lending community as it attempts to foster an economic recovery."

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