Wednesday, October 1, 2008

GE's Risks Rising to the Surface

An analyst at Deutsche just figured out that GE is mostly a finance firm and lowered his estimates for the bellweather conglomerate. Of course this downgrade only came three days after the company itself cut its own earnings estimates, froze its dividend and stopped its stock buyback program. I'm not really sure what finally clued-in the crack analyst at Deutsche. Was it the $200 billion in short-term debt that GE relies on to fund its operations? Maybe the complete and total meltdown in the commercial paper market, where GE borrows about $65 billion? Perhaps the fact that the CDS on GE Capital has blown out to 700? I'm sure the analyst will claim that there's no way anyone could've seen this unprecedented disruption in the capital markets coming. Really? I'd like to offer up exhibit A as evidence that many Wall Street analysts still suck at forecasting and identifying risk in a company: a story I wrote in June entitled "What's behind the curtain at GE?" In this post, I pointed out the opacity of GE's balance sheet and how I would never invest in a company that had billions of assets labeled as "other" on its balance sheet. Furthermore, I noted that GE depended on significant amounts of short-term debt to finance its operations and that it could face liquidity problems if disruptions continued in the capital markets.
So here we sit, three months later, the Fed is pumping crazy amounts of money into the money markets to no avail. Money market investors refuse to buy commercial paper unless it is from a AAA credit, which means you'd darn well better keep that AAA rating or you'll have to go to Congress to beg for your own bailout loan like GM and Ford. The Senate will vote on a $700 billion bailout package that may indirectly help alleviate some stress in the money market, but does not guaranttee immediate relief. Finally you have a CFO who swore on September 25th that GE will not have to draw down its bank lines of credit. That was a major tactical error. The CFO should've drawn down that credit line because now he just sounds like every other CFO that has claimed they don't have liquidity problems that has since failed. The minute GE has to touch that credit line, it implies there are big problems at the firm. And that is how liquidity problems can become fatal.

2 comments:

Jamil said...

Well one thing that wall street and not-so-smart investors/traders in wall street do not understand is that in this US economy meltdown, GE (and GE Capital also) is the only so called "financial diversified company" that is giving income which is better than last year. Investors put a lot of focus on actual income compared to what was planned and announced by GE in the beginning of the fiscal year, but they don't realize that market actually took a turn that no one of wall street investors (including US government) have ever predicted or thought. Starting from Bear Stern and now temporarily stopped at Goldman bailout by Buffet and Wachovia buyout by Citi (I am sure there will be more events that no one in wall street or US government is capable of predicting...), has anyone in wall street (or US government) ever predicted that these big names will fall on their knees in such a short time???
GE is one of the most stable and diversified company in the world. Besides GE Capital, GE has Infrastructure, NBC Universal, Energy, Healthcare....and all of them are performing great with a better future waiting ahead because of huge R&D spending by GE in the right place and right timing. AAA rating is also very safe with no risk of downgrade because of funding limitations...GE provides an oppotunity to all investors in the quarterly call with Immelt and Keith to ask things like "others" in the balance sheet...instead of making wrong assumptions, I would suggest to wall streeters to leverage this opportunity to better understand GE!

Anonymous said...

" WE DO NOT HAVE A LIQUIDITY PROBLEM. WE WILL NOT HAVE OUR RATING DOWN GRADED. WE WILL NOT USE OUR CREDIT LINES. WE WILL NOT RUN OUT OF MONEY. NEVER... NEVER. Hail John McCain.
- Bagdad Jeff