The Dow Jones Industrial Average (^DJI -0.35%) was down 0.5% at 2 p.m. EDT Tuesday as only a handful of the index's 30 components traded up.
Trading down 1%, General Electric (GE -0.03%) is in the bottom third of the blue-chip index's performers this fine Tuesday. The reasons why may not be blindingly obvious, so let's have a quick look at GE's bad day.
The company's own news feed is no help. It's packed with positive releases about wind power deals in Texas and Scotland, adding up to more than 300 megawatts of new wind tower sales. If that was the whole story, GE shares would be sailing smooth seas today, possibly trending upward a little bit on these large but not game-changing energy projects.
However, that's certainly not the whole story.
The first clue comes from who's doing even worse than General Electric. Goldman Sachs (GS -1.53%) was down 1.4% and JPMorgan Chase (JPM -0.39%) fell 1.1%, pointing to pressure on financial stocks. This makes sense because General Electric extracts 30% of its revenue and 37% of its operating segment profit from the GE Capital financial services division. In many ways, GE is a large bank in industrial clothing.
Following these bread crumbs, you'll find an alarming story at the Financial Times. "Bankers warn over rising US business lending," the newspaper headline warns. This looks like a direct strike at GE's corporate lending practices, so what's going on with these runaway business loans?
Anonymous banking industry sources say that business loans are on the rise, but for all the wrong reasons.
"The larger part of the usage in the market right now are loan refinancings where companies are paying dividends back out," said one unidentified banker. Another explained that it would be better to see these funds going into "new warehouses" and other capital investments rather than simply kicked back to shareholders. "You don't see the foundation, the real strong demand."
"It is loan growth, just not sustainable," according to a third banker.
If so, that's actually a double strike against GE Capital.
JPMorgan and Goldman issue plenty of these corporate loans, but GE Capital isn't far behind. If the Financial Times' sources are correct, GE is putting $3.6 billion of commercial lending revenue at risk every quarter by participating in a weak market.
Moreover, GE likes to provide seed money for actual infrastructure investments. If GE Capital's loans aren't supporting the purchase of more GE products, then what's the point?
From this dual-threat perspective, GE's decline makes sense. However, there's one more plot twist to this story.
Given GE Capital's role in the industrial conglomerate, one would hope that the banking arm sticks to its guns. If GE Capital goes out of its way to focus on capital investment projects rather than the (allegedly more popular) general-purpose funding market, then the company sidesteps this particular problem.
The company is set to report second-quarter results next week. Keep an eye on that report, as it gives management a chance to clear up the corporate lending threat. Look for signs of tight integration with GE's industrial operations. This is one of those times when chasing easy revenue could be bad for the long-term bottom line.