If GE were still primarily an industrial company, this possibility would be so remote as to be barely worth considering (assuming GE's current cash flows and cash cushion). Now that GE has such a huge finance division, the odds are higher, but still remote.
As Warren Buffett pithily explained, anything multiplied by zero is zero, so if GE Finance suddenly has a run on the bank, the rest of the company could go down with it. That said, GE Finance is insulated from the credit crisis by carrying far less leverage (debt) than its Wall Street competitors and also by not marking its entire book of assets to market. If it had to do the latter, GE Finance's writedowns thus far would likely have been far greater than they have been. By holding loans to maturity instead of in a trading book, however, GE Finance can wait to take losses until loans actually stop performing. This eases the pressure on near-term funding requirements and reduces the likelihood of a run on the bank.
For GE Finance to go to zero, the company's short-term financing would have to dry up suddenly, the way Lehman Brothers', Bear Stearns, and AIG's did. Now that the government is buying GE paper, this seems highly unlikely. Also, because the company isn't marking its whole book to market, it's unlikely that it will have to take devastating losses each quarter that would suddenly make its leverage ratio fly through the roof (and blow its credit rating), as happened at its erstwhile Wall Street competitors.
More likely, GE Finance will just continue to have crappy profits until the credit crisis ends. This could still hammer the stock, as GE Finance's profits still account for more than a third of GE's profits. In a really bad scenario, if GE's $600 billion of loans started to default en masse, this might force GE to raise more equity capital or sell off other divisions at fire sale prices just to cover the Finance losses. But even this still wouldn't be likely kill the whole company.
So we've got that going for us.
More from GE's Q3 investor presentation below:
GE could sell the division (or, if things got really bad, pay someone to take it), and as long as the other divisions were worth more than it lost on Finance, the rest of the company would still have value.
But they can't just say, "Um, we've decided we don't want this $600 billion of loans anymore."
Which "they" are you talking about? GE or GE Finance?
GE Finance can't decide to ignore its obligations. The question is whether GE is on the hook for those obligations.
You say GE Finance borrowed 200 and lent 600. Where did Finance get the other 400? If it was equity from GE, then GE may lose the money, but Finance won't have to come up with the money if the loans default. If it was third party debt, Finance will have to repay (but not GE unless it guaranteed the debt).
So if GE Finance's financing disappeared, GE would likely have to sell off other divisions (or equity) to raise enough money to plug the hole.
All of this is extremely unlikely given the government's buying GE paper. And if we take GE at its word, the loan loss exposure shouldn't get beyond single-digit percentages of the asset portfolio (fingers crossed).
Thank you for providing a very realistic portrayal of GE's current condition and future outlook.
Many bloggers seem to enjoy posting ridiculous armegeddon type rumors about GE with no substantial facts or financials to back up their thoughts. Unfortunately, many people read these rumors and this just causes more panic and drives the stock price down.
I share the others' appreciation of your work.
And if you read that last slide more closely, it is saying something like: 59% international credit, of that 79% consumer = 47% consumer international total, of that (or the whole thing actually, not clear) 58% consumer secured, which sounds like Home Equity Loans to me, no? And we all know how those have worked out/are working out...
Am I reading too much into this? It seems to me like their exposure is pretty massive, even though, as Henry points out, they may not have to do any large-scale write-downs for a while. But that 2% default number looks dangerously blue-eyed...
Look GE Finance IS GE. Its a division of GE. Any money owed by Finance is owed by GE.
"Did Henry Blodget Engage in A Sexual Intercourse with a Chicken Last Night?"
I think you could see the dividend get dropped for a short period of time to shore up the balance sheet. GE is in everyones 401(K). Any move that the company would take to prevent going to zero would be welcome to the large institution shareholders that control most of the stock. Most GE employees also have a large chuck on their own assets in the common stock of the firm.
When I worked for GE, Sherin kept beating the drum of AAA credit rating, 10% organic growth and constant dividend. That was when the stock was stuck in the $32 - $35 range.
Jake is correct. GE Money is part of GE, there is no separation that would allow GE to drop GE Money.
I think you could see the stock drop below $10 / share, which would be a ~4.75 PE ratio. Phillips is already below that level.
Final note, I love the GE 'Inspira' font. Cost the company millions of dollars and it looks like garbage if you reduce the font size below 14.
If Henry said unlikely,
Again I said,
"Never treat the unlikely as impossible or the likely as certain."
I too worked for GE... one of the underperforming units. At that time almost every other division was regarded as a stepchild compared to GE Capital.
I bet the "stepchildren" are secretly snickering now if not for the fact that their retirement funds are mostly tied to GE stock.
http://www.gereports.com/
can we do a price point of where the stocks will be in 1 year.
citi - goner
bac - 5 bucks
aapl - 40
goog - 120
ge - 0
rimm - 15
crm - 10
fslr - 40
spwr 10
hig, pru,met - goners?
american govt - 0
fed - 0
consumers - 0
Also depend on my GE Pension. Is it fully funded and would it continue in event GE failed?
Is GE Finance the division that holds the mortgage backed securities? These securities, as everyone is aware, has all the subprime loan tied into it. How much is it estimated that GE holds? Is the government buying this from GE?
So...as the stock dips and my GE 401K drops, I'm going to stock up on GE Stock. It's going back up at some point. The oldest company on the Stock Exchange will bounce back.
If not, then if GE Capital goes bankrupt, GE is still left with businesses that did $10B of net income in 2007 and only $14B of debt.
GE's cash flow crunch will be backed by the US and foreign governments. They'll get paid back. Spank the "genius" financial group, dole out some penalties, and let's move on with our lives. Now we've learned where the scams are and we can avoid them.
One thing: if there are contract terms which require triple A rating, at this point, any lawyer could get GE out of that. The unexpected circumstances, combined with total lack of definition, puts the entire clause under suspicion. At a minimum, tie it up in litigation for a few years. Sheesh. Those will be a log in the road, not a bombshell. (Legal types: remember the Westinghouse uranium case from decades ago? Unexpected market conditions invalidated a contract clause?)
This whole thing is ridiculous, and people are running around like sheep. Don't you think the rest of world wants reliable electricity and clean water?
C'mon.
so what's the difference?
sell everything, buy GE.
your articles do seem a cut above the rest
( might you be the fellow who got into trouble over tech wreck, by any chance ? just curious - your writings are appreciated anyhow )
but `fusion' is surely correct altho only GE or its lawyers (or filings) can say for sure - unless parent co guaranteed finance subs debts, rest of GE could walk away if Finance tanks
Raleigh retiree, pension benefits are typically backed by the PBGC arm of the us gov. What isn't often understood is that they don't take over payment obligations, just some portion. Do some web reading just so you understand the risk better. The PBGC has not been a great source for info in the past.
New GE Interest plus gets fdic wrap effective Nov 13, 2008 through 2012. If you're anxious you could always early withdraw the old deposits and redeposit with the wraps. Seems more research needed...
net income ($38,732,000)
GE 316,000 employees
net income 22,000,000
The Gov is going to bail GM out. Somehow I don't think GE is going anywhere.
See u at zero baby... or close to it.
GE Capital still made 10 billion dollars in the worst year ever.
Remember, speculating in stocks is not for young boys in short pants. Don't propagate fear and continue to artificially depress the stock price.
If history teaches us anything it's that some of you have learned nothing from history. Buy GE when fear is prevailing.
Thanks..
Au contriare. This is more like those folks who bought the dot com stocks AFTER they have dropped from 100's to $10 with the belief that it is "cheap".
GE is a behemoth who is leveraged to the hilt with GE Capital (just like the failing banks), and it is totally legit that the company may require bailing out... wiping out its shareholders in the process.
I think it's a losing proposition to bet against GE. Firstly the company, is a AAA rated company, which was re-affirmed by S&P in early October, in the middle of the huge credit hurricane. To get a AAA rating from any of the rating agencies is a long and exhaustive process. They come in and pour through your accoutning books and records, and do a lot of stress testing, etc. It's not just a tick in the box excercise. To have that re-affirmed in the midst of huge crisis and panic says something about the company.
Additionally, the government has taken measures that bolster the ability for GE to raise funds, in particular through the bond and CP markets, which is where it gets 80% of it's total funding. The government has agreed to guaranteed GE's commercial paper or buy it in should investors in that paper want to get out. They same is true for GE bonds. GE's commercial paper still trades at about Liber (90day) less 25 Bps and below the fed funds rate. So the company clearly has no troubles issuing CP at low rates, and has been doing it for ages, with out any trouble. But the fed stepping in doesn't really help GE so much as it helps the investors in GE's commercial paper and bonds, by providing them a way out, because remember a lot of the investors in GE are big institutions and pension funds, insurance co's etc, and they have their own liquidity issues, and some are in liquidity crisis, and having to sell assets so they can meet other funding requirements / cash requirements / reserves, etc. plus honor their dumb bets in credit default swaps and CDOs. It creates a more active secondary market for GE's debt investors.
As I said before, GE Capital does have a lot of debt, but all of that is matched by equivalent loans to solid borrows, and secured by assets that GE knows and understands, and has spent years developing the asset management expertise that the banks don't have. If you look at the banks they go in and out of the spaces that GE plays in. They entered the equipment leasing market back in the boom times, then got out in last few years (GE cherry picked some good portfolios). GE has a real competitive advantage because they tend to make long term committements to a space, and develop expertise. Like photo copiers for example. GE is the worlds largest leaser of Xerox and Ikon photocopiers. Do you think the banks want to even dabble in that business - no because it's not sexy. But how important is an office photocopier to any business - it's pretty crucial, but often overlooked. Also, it's extremely profitable, when the lease is up the customer typically keeps paying the standard lease payment. They don't typically rip out the photocopier / printer, etc. because it's all embedded infrastructure and they're use to it. etc. GE underwrites these assets in a very conservative way and all the debt that you see on GE's balance sheet is matchfunding against similar loans in duration to the customer. If the customer doesn't pay, then GE can seize those assets, and they have monster asset management team that can install that machine into another customer - globally, any where in the world. Where do you think GE puts all of the old IT computers and printers that US doesn't use any more. They sell them to dealers in East Europe, China and India. Same is true for manufacturing equipment and machines. GE knows the assets it lends against better than anyone, and they bring an industrial mind set to managing them over their useful life. Sometimes, they make more money selling these assets on the backend then they do actually leasing them, because of their global asset management capabilities.
The risk if you buy GE stock is if the company gets downgraded from a AAA. The company just got re-affirmed this rating as I said before, so that risk is now virtually eliminated. It doesn't have any short term funding risk, particularily because the governemtn has created a secondary market for existsing investors, which should hopefully help them to not worry, and maybe sell other assets to raise cash they need. Also, GE is determined to not lose the AAA. The company is 100% committed to it. In fact, back in the hay days, the company could have made more money and been more profitable, by letting the AAA go to a AA or single A because they could have had higher leverage and so done more deals and had higher Return on Equity, etc. but the company never did. There were a lot of calls from the analyst community suggesting this but the company never budged. Now of course they are genious for keeping the AAA, because there couldn't be a better time.
In short, I think now couldn't be a better time to buy GE stock, because the selling pressures are not fundamental to the company performance but a result of other things going on in the market. If you want a solid divident paying stock, that's a bellweather for the global economy GE is a good fit.
It's industrial business have no debt, and generate a ton of cash. They have order backlogs out 5+ years. Why because GE plays in the spaces that the world needs. GE's aircraft engines are 85% more efficient then their competitor. Same is true for their locomotives and energy turbines. Thier locomotives plant in Erie, PA is at maximum capacity. They can't make the machines fast enough. A buddy of mine used to work in the plant bending steal and he got paid time and a half because he was always working weekends. Why is locomotives, because China and India are ordering those things like hot cakes, not to mention the big 6 rail companies in North America need more capacity. GE couples these engines with services, which are much more profitable. The rail business in US is regulated so the machines can only run on certain rails at certain times (e.g. not through a neighborhood at 2am, etc) and the rail tracks are limited because government never invested in them and built them out, and the 6 rail companies in N. America have to share the tracks GE develops the software that optimally plans the most efficient route, etc. And bundles this on an engine sell. Not to mention all the spare parts and quarterly maintenance that these things need... huge profit margins there. Did you know that when China makes all their goods and sends it to western europe they do not go through Asia / Middle East / East Europe to get it to say Germany or UK for example. It's much easier for them to cross the pacific ocean, then truck it or rail it accross the USA, and then ship it accross the atlantic. There's less international barriers and import / export rules to deal with, plus the US highway / rail system is more efficient relatively then all those little crappy countries they'd have to pass through. So globalization of goods and services is driving huge demand. Truck drives is a job that's hugely understaffed right now. You can make upwards of 75K a year as a truck driver these days. Rail is at capacity too, and with higher oil prices, and need for more efficient engines then the last GE is sold out. Thier latest locomotive runs on hydrogen or is electric or something like that, but in either case it's much more efficient than the last and beats the competition. There are few competitors too. Rolls Royce is a big player, but that's about it I think.
In case you're wondering I have a huge amount of my own personal money (albeit not a lot to others but is to me), and so obviously I have a huge incentive to spread good press about the company, but in this day and age, if the US economy blows up the last company standing will be GE. 60+% of the companies revenues are outside US.
Before you idiots hypothesize that GE will fail because it's "like the banks, you should know the real difference" and do a bit of homework. Lets not keep spreading fear and panic. The Dow can only go to zero you know. Do you think that's going to happen, really?
Don't be an idiot, buy stocks. it's a great time, not just for GE stock.
Since they don't borrow like the banks, they don't have a short term lending risks like the banks did. They also don't egage any anything to complex / sophisticated like Credit default swaps / Collateralized debt obligations. "GE is smart, but not brilliant" like that, is one quote from a senior guy that I read about. That's how all the banks got themselves in a cluster f*ck of obligations to each other, with no real certainty of what the underlying assets are worth (because they're all unsecured lenders, remember!)
Even the GE money business, that the company is trying to sell ha been profitable this year. The company wants to sell it because it doesn't like the space, and it's levered too much. Requires to much capital, and they'd rather deploy capital in higher returning businesses too. The returns on equity in GE money are somewhere in the low teens, good by any normal investors standars, but GE looks for ROE% north of 20% in capital business (now they will get even higher returns with cost of debt going up accross the board but probably incremantally more for GE's customers than the GE itself). They exited the insurance business for much the same reasons e.g. low returns.
Additionally, the company in general wants to downsize the capital business so that it's inline with about 40% of the total company. Capital firms get a lower PE than industrial businesses, so have a smaller capital business should help the stock appreciate better.
Also, take a look at GE's net income and you will see that the company made more in 2008 then it ever made before! And it's GE Capital business, with 10 Bn in net income, was more profitable than any of the other financial firms - combined!
Thanks Again..
It's clear that anything is possible given the current sentiment and fear driving the market. Let's be resonable though. These type of declines happen. It doesn't mean Doom and Gloom forever. Certainly recent events are unpresidented atleast for my generation. Have faith my freinds. I was behind a lady in line recently buying a GE slow cooker. My wife was in the hospital last month and the ultra sound device was made by GE. I toured the Boeing plant outside Seattle with my family and watched workers install GE engines. Everytime I walk into my kitchen I see the GE logo etc... My point is we will continue to cook our food, visit the hospital when needed, Fly on planes that are constantly serviced and life will go on.
If I didn't know better Mr. Jake and those with the same opinion, I would say somebody is shorting GE and trying to drive the price lower. If that's the case my friend don't get caught short this week. You've been warned.
Regards.
Have very much enjoyed your info and opinions. My father just passed away, and left 43,000 shares of GE in a trust that I must manage. I can sell, diversify, cash it all in, or stay in fhe game. I am 46 years old, and have been "trained" by my Dad for the last 34 years. He gave me my first subscription to Forbes and Money when I was 10, and made me pick a Mutual every year after my 18th birthday, and funded them for me as IRA's.......and as a lesson to add to my mini-portfolio of learning how to plan for the future. Here I sit, comfortable in my faith in GE.......but wonder, would you diversify more?? This is a nestegg that I plan to send my kids to college on.
Thanks;
Scott
Thanks for your compliments. I am happy to offer my opinions.
It seems to me GE is at or near a bottom, as well as the market in general. I think this because of all the serious finance actions that the government has taken. In business and economics there is one general rule, and that is that the government always wins. They will keep throwing cash at this problem until it goes away, and do any tricks that they can. We are seeing the effects of actions that took in the last couple quarters now, and liquidity has eased now in the system. But still there is a consensus that there will be a recession for next 6 months it seems. People haven't been spending and so everything has slowed. But this will be balanced by massive government spending and stimulus to the economy. Risks are if the US government gets downgraded as a AAA entity. There was an article in the WSJ talking about this a few weeks back. If this happens, then by default no US company can be a AAA rated company. But hopefully that doesn't happen, and I think it won't. Also, hopefully the US government doesn't get to protectionist, because international trade and low trade barriers is also a net good thing for the economy, at least that's what all the economic experts say. Scott and Debbie at ages 46 and almost 50 you should be looking to diversify more. This is the general investing rules, as you probably know. Keeping all your money in one stock is in general pretty risky. I keep all my money in GE stock because I'm young - 29. But I will try to diversify as time goes on. Warren Buffet keeps all his personal money in US Treasuries, and he holds personal money in only one stock - Wells Fargo (used to be AAA rated bank - one of only 8 companies, they got downgraded to AA though I think after they swallowed up Wachovia). But that said Warren has stock holdings through his company Berkshier Hathway and that includes Goldman and GE, and others I don't know about.
I think if you are trying to keep your money in GE for 5 + years then you are safe. Given that I think it's at or near a bottom now, you should get a decent return. I would consider short term < 1 year. Medium term 2-4 years, and long term 5+ years. Beyond 5 years it's kind of hard to predict much really.
I probably wouldn't consider Apple a growth stock now versus as much as they used to be a growth stock. Of course that's all with high insight now after observing their explosive growth. So basically you should try to look for other better opportunities then Apple. I don't know what they are myself - no body knows. But you should pick up some books from Jim Cramer. He has good stock advice and a proven track record of performance too. You should look in the bio-technology space. They are doing some funky stuff now a days with predictive health and mapping out the human DNA / genes and stuff like that, then they develop medicines based off your characteristics and can predict what illness you are prone too, etc. It helps insurance companies lower their cost by treating you earlier, but there can be a moral hazzard too if they use it to deny you insrance, but government won't allow that obviously. With all the baby boomers retiring over next 10-15 years there will be massive innovation in healthcare and medicines though (there already has been). Plus baby boomers are pretty wealthy too (or maybe not so much now with stocks down - but hopefully the diversified out of stocks) Not to mention healthcare demands in China and India too. Look for companies that are on the leading edge in technology here. I used to know a few but don't know their names now.
Also, it looks like green energy will be a huge deal now. Green venture capital is the new gold rush out here in silicon valley california is what they say. And remember government always gets their way, so they will throw cash and give incentives to people who develop the technology. You could go to venture capital companies websites and see what companies they are sponsoring and then try to understand these and pick a few theres.
Financial companies will be hurt it seems in medium term because they will have to operate with less leverage, so the returns won't be as big.
Also, I think video games and hand held devices will continue to be a mega trend (e.g. Apple). There's companies developing better and better games for smaller and smaller devices. To go along with all these devices you need content (e.g. Universal, and other big media companies). So they will be key players in this space.
You can also try to diversify geographically if you dare.
But in general, at your respective ages, I would be trying to keep all your money in stocks. You should have a mix of other stuff like high yield CDs and US treasuries. But your still a good 15 years away from retiring, and if you're money is in stocks I'd probably keep it there and take a little bit off the table as you see it go up. So if you got money in GE stock, then you should maybe take out 10% or 15% if you see the stock go up by 5% or more, and slowly over next few years take money out. I still think you can have a large part of your portfolio in stocks though (e.g. 65% say), but to preserve your wealth you should start to be more risk averse. You should have a more diverse stock holding too. But it seems your goals are to grow your money so you should definately try to pick a few good stocks. You don't need an investment advisor either they just charge you moeny, and this stuff is not rocket science - you can go online and read their analyst reports and things or read companies annual reports too..
Also, high oil impacts a lot of business positively. Anybody who makes things that are more efficient, well their value add increases with the price of oil. So with oil down now, could be a good opportunity to buy some of those companies stocks. GE should benefit hugely from higher oil prices - since all their machines are more efficient than the last, etc.
GE just confirmed that they will maintain their 2009 dividend at $1.24 per share. So at today's share price of 15 odd dollars you are looking at a dividend yield of like 8% or 9%. So basically you get a guaranteed return of that amount. All the analyst got GE pegged currently at about 24 or 25 bucks a share... I think you can't go wrong putting your money in GE if you are going to hold it for 3 to 5 years or more. But again this is just my humble opinion... I'm not a stock expert.
Also, GE's revenues are 60% international, and they are playing bigger in countries like China, India, and middle east... all those companies will be spending enormous amounts on infrastructure in order to stimulate their economies (e.g. building energy plants / hospitals / transportation, etc. ... that's all right up GE's alley, and few competitors too, and GE's been working on a "company to country" approach with all these customers. I think GE stock has a lot of upside at today's prices... I think it has a better chance of going up then down at this point.
China recently announced a $586Bn economic stimulus package to stimulate their economy... that's how most of these countries will bolster their economy during a predicted downturn / recession e.g. spend / spend / spend... governments always get their way, and GE is a huge beneficiary of government spending.
GE management will do some things to re-structure the company too, so the company will come through this turmoil better / stronger for the future (e.g. more profitable).