Thursday, March 5, 2009

An uncomfortable observation for GE common

One of the cases for GE is that GE does not guarantee GE Capital Services (GECS).  GE has less than 40 billion in debt outside the GECS structure – and if you buy GE and they let GECS go you get

  1. The industrials business which – as GE points out – makes about 17 billion in cash a year and requires only 3 of capital expenditures, and

  2. NBC Universal – which happens to own a few nifty (and well watched on Wall Street) cable channels.

This sounds like nice downside protection – except that the FDIC tied General Electric up.  Not that I am used to saying anything nice about Sheila Bair – but the FDIC guaranteed debt that GE Capital issued has a guarantee from the parent company – at least as per this disclosure in the GE Capital Services form 10K.

At December 31, 2008, GE Capital had issued and outstanding, $21,823 million of senior, unsecured debt that was guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary Liquidity Guarantee Program. GE Capital and GE entered into an Eligible Entity Designation Agreement and GE Capital is subject to the terms of a Master Agreement, each entered into with the FDIC.  The terms of these agreements include, among other things, a requirement that GE and GE Capital reimburse the FDIC for any amounts that the FDIC pays to holders of debt that is guaranteed by the FDIC.

Sheila Bair protected the taxpayer – but at the expense of crisis residual value in GE.  

Of course this is only operational if GECS fails.  And whilst I have worked quite hard on that - and my prima-facie view is that it does not - I will admit I just do not know.



andy said...

since last sept i have yet to see one good reason for dumping ge. one reason that's all i need, but i keep getting 'what if', 'but', 'tangible equity' and the like from the 'analysts'.

first they worried about rolling q4 CP. that got taken care of 100%.

then '09 debt is huge. $48b cash and 70% debt secured later they moved on.

now the latest i heard is 'what about 2010? that's huge'

i swear paulson is running out of bad news. next we'll hear about exposure to togo-togo.

anyone shorting based on CEE exposure will have their head handed to them.

dec 2 presentation says UK mtg exposure 4% of assets. calamity! as a matter of fact, if i take their worst case scenario there, on the whole portfolio, and double the impact, i get $15b. so they can still make it comfortably but at that point i'll be more worried where to get the next round of .45s than the stock price.

jpaulson testimony to congress should be watched to understand what's behind this.

of course they can always be the next enron. but i doubt it.

John Hempton said...

Oh come off it Andy.

GE is at core a capital equipment play.

Before September the US dollar was weak and China was strong.

That was NIRVANA for GE. They got to sell lots of (expensive) kit and their competitor (Siemens) was crippled by the strong Euro.

Now the US dollar is strong and China is weak.

That is hell for GE.

If you have not seen a single reason to sell GE then you are willfully blind or dumb.

Now whether there is a reason to sell GE now - that is another question - and the one that I am trying to answer.

But the bull story for GE is just not going to materialise. The question is whether the outcomes are bad but ok in the end or whether you are dead in the end.


andy said...

well i was referring to gecs which is obviously the culprit here. and of course it depends what your timeframe is. i don't see the industrials valuation impaired because china is weaker for a year or two.
but i must say it was impressive how they absolutely pinned it down today when the market was rising. professionals.

Anonymous said...

Andy here is a great reason to sell GE.....its down 80% and is headed lower. You can stay in this pig all you want but make sure that you realize it is a pig. Apply your makeup as you see fit but underneath all that lipstick Immelt is running a big ole PIG.

dawase said...

Held GE a long time but sold it at 24 & 13 largely because of

1. No confidence in Immelt after the earnings boff and the dividend cut,

2. massive debt due in '09 during worst credit crunch in a century,

3. GECC is a black box, and

4. Stock was down a lot already and who knew where the bottom was.

However, I bought some of it back last week at 6.5. Why?

1. Immelt is still an idiot, but he's as good a manager as you can find.

2. The debt due in 2009 has largely been addressed.

3. They're going to open their kimono next week and show the world what the real exposure looks like, and

4. Last Wednesday looks a hell of a lot like short-term capitulation to me.

Guess we'll see how it all plays out, but I'm happy to own it at 6.5 and still have a loss that I harvested on the old position. If it goes lower I'll probably buy more unless the balance sheet walk-through is a total disaster.

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