20 November 2008

Is General Electric collapsing?



I never want TYWKIWDBI to be a vehicle for investment advice, but the GE story is worth at least a brief mention as an object lesson.

General Electric has for a generation been a bellwether stock - huge in size, diverse in scope, and emblematic of U.S. industry. It's recent fall from grace (i.e. fall in price, charted above) has been dramatic; after 5 years at a price of $30-40 it has tumbled to less than $15. The knee-jerk defense of the stock is to pull out a longer-term chart,

note that it had an impressive runup in the late '90s, and assert that its a tech stock that rode the "tech bubble" of the 90s, and now it has fallen back to its 1996 price and onto the trendline of the 1980s.

Not so fast. As the price fall accelerated yesterday, there were a number of articles explaining that GE is not just a tech company, any more than it is a company that makes light bulbs. It is also... a bank. What more dreaded label could one apply in this market environment. But it's true:
GE is a bank disguised as an industrial conglomerate… Being a bank during the boom years of 2004 to 2007 did wonders for GE’s bottom line. Being a bank now is a rocky path to destruction.

GE Capital is enormously leveraged to consumers throughout the world. It issues credit cards for Wal-Mart, Lowe’s, IKEA, and hundreds of other retailers throughout the world. GE Capital provides private label credit card programs, installment lending, bankcards and financial services for customers, retailers, manufacturers and health-care providers. It also owns 1,800 commercial airplanes and leases them to 225 airlines worldwide… The crucial question is whether the people and companies who received loans from GE Capital can pay them back. GE’s future is highly dependent on the answer to this question.

Egan-Jones, an independent rating agency, calculates that GE is levered ten-to-one, a more conservative and higher number than the company's eight-to-one figure. Cofounder Sean Egan believes that, depending on the off-balance-sheet holdings, actual leverage could be still higher… With cash of only $59.7 billion and short-term debt of $218.7 billion, the freezing up of the credit markets has put GE at major risk when trying to rollover their debt…

The future does not look bright for GE. A perfect global storm will hit GE in 2009. GE is like a giant supertanker loaded with debt that is in danger of being swamped by this perfect storm. A GE collapse would not bring good things to life. It would bring about the mother of all bailouts.
Followup:  When the above was posted, GE was trading at ~$14.  Three months later it bottomed just below $7.  Now, two years later, it's still below $15.

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