General Electric: 'Buy America' Clause Severely Limits Downside Potential 25 comments
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One of the unintended consequences of the stimulus legislation passed on Friday will be the potential validation of Jeff Immelt's vision of a truly global corporation. Since Congress has made the Buy America provision subject to current trade agreements, General Electric (GE) may well become a unique contender in the bidding process for infrastructure projects.
Speaking at the Canadian Club in Toronto last Tuesday, Mr. Immelt said that the strong Buy America sentiment in America was a mistake, and that business must "embrace the power of globalization." General Electric, in fact, has led the field in constantly identifying cheaper raw materials and cheaper production outlets internationally for the better part of the previous decade. As one Middle East banker told the BBC yesterday, "GE's timing was widely questioned in recent months, but the philosophy could well prove itself now with billions of dollars being dedicated to infrastructure, energy and health care, and with the G-7 determined to reject all protectionist measures."
At the end of the day, it is indeed all about protectionism. And, in this writer's view, the Obama Administration should have taken a leaf out of the emerging-market book and acted on the premise that a third-world nation (i.e. America, notionally) is confronting serious challenges deep inside its economy. There is little point in being the leader of the "free world" if the only freedom the developing world recognizes is the freedom to retain and construct formidable barriers (bureaucratic and fiscal) to international capital.
Besides, America is showing specific third-world characteristics: the jobless number, the poverty of the inner cities, the millions of undocumented workers, the sharp deterioration in household wealth, the constraints on consumer spending and falling asset values. Protectionism is the only answer. Without the umbrella of protectionism, stimulus legislation is counterproductive and will quickly turn into an illusory quick-fix.
Washington lawmakers are either unable to comprehend or unwilling to acknowledge the real crisis within the American economy: globalization has rendered numerous key segments of American manufacturing conclusively uncompetitive. It is, no doubt, politically correct to claim that "American labour is the best in the world". But, best or otherwise, a huge proportion of working Americans are engaged in the production of goods at prices which can be easily challenged by factories in China, India and at least three dozen other developing nations.
A logical approach to the current crisis would require a forthright analysis of the elements within the American economy which are essentially superfluous in the global context, absent protectionism. No politician, regulator or economic advisor appears capable of declaring that, without comprehensive barriers to the import of foreign goods, thousands of American companies engaged in the manufacturing of textiles, machinery, package foods, toys, furniture and personal items should simply be shut down. But the fatal flaw in the Obama plan is a subject outside the confines of this recommendation.
For our present purposes, the fact is that the manner in which the Buy America clause has been written into law offers General Electric the genuine opportunity to transform its international presence into a money spinner. Just a few weeks ago, Wall Street was debating the real value of GE's foreign asset; now, given the last-minute dilution in the Buy America clause, a good portion of those foreign assets are likely to become a significant advantage.
Though concerns regarding GE Capital's loan delinquency allowances still linger, and GE's reliance on the government (for commercial paper support and bond guarantees) will continue for an extended period, a share price in the $10-11 range represents an exit for shorts. Long positions in General Electric are not being recommended, not by any means, for two reasons. Firstly, this writer is basically reluctant to go long on any stock in a climate where the systemic risks within the financial system are still very much intact. Secondly, the actual implementation of the stimulus package, which will without doubt be a trial-and-error exercise, needs to be tracked closely. But the shape of the Buy America clause does serve to severely limit GE's downside from last week's lows.
Disclosure: No Outstanding Short Positions on GE.
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All of a sudden the author found out that GE is a manufacturing company with a financial arm. A great company! Buy GE now because it is cheap...and the stimulus, as it is written, will limit the downside.
On Feb 15 11:36 AM HiSpeed wrote:
> This author actually believes a trade war would be good for America?!?
> WRONG! Protectionism killed global trade by OVER 60% -- this was
> a significant contributor to the depth of the 1930s Depression!<br/>
>
> Protectionism was and will be a complete disaster to the US economy!
>
>
> History has proven that protectionism has failed America miserably
> in the past. I'm afraid this is going to be one of history's reruns.
> The author is a fool for promoting such poorly thought-out tripe.
>
>
> BTW, GE is going to cut their dividend soon.....
Of course, there are always those who are married to their particular ideology and will not pursue what is in the best interests of the country. Even if you are personally high enough in the pecking order of capitalism so that you benefit most personally from the current impoverishment of your fellow Americans, consider that each of the so-called global financial "power-houses" retreated to its respective home country to be bailed-out: the Americans got bailed out by hard-working American taxpayers, Europeans by their respective countries, etc.
So, to continue to be married to an ideology which only narrowly serves the purpose of a select few is, to put it simply, evil, in my opinion. Buy hey, if one's nature is naturally evil, then what do you care, right?
Enough said.
On Feb 15 01:44 PM Rakesh Saxena wrote:
> Dear HiSpeed: You are one of those people who continue talking about
> the economics of the Great Depression without any facts in hand.
> FYI, the "globalization" we speak of today is unique, and the facts
> as they present themselves today are entirely different from the
> "global" facts in the 1930s-1940s. Moroever, you are perhaps not
> aware that numerous countries have restructured their economies with
> the aid of protectionist measures. I am not advocating a trade war;
> protectionism is a reality, let's deal with it constructively. So
> don't be misled by your local Congressman. And facts, please! Many
> thanks-Rakesh
On Feb 15 04:31 PM NITRAM wrote:
> Dear Saxena.Were you alive during the Epression. No. you talk is
> what you read in books or heard from other people.You talk through
> your butt. You are correct in not listrening to any Congressman.
> However, if you dont believe that Tzar Obama and assistant Tzar Emanuell
> want Socialism and a trade war, you should clean your ears. I am
> from New York and I am sorry to say I voted for Chuck Schumer. Did
> you listen to his news conference. He said, " Americans dont care
> about PORK". I care how my money is spent. I have never been political,
> but know I will work against everything Obama and his socialistic
> team say and do. You ust realise that every day he changes things
> that he said durinng the campaign. He appoints and congress approves
> a Treasury Secretary who has commited crimes against the agency he
> heads.
>
>
> On Feb 15 01:44 PM Rakesh Saxena wrote:
On Feb 15 04:31 PM NITRAM wrote:
> Dear Saxena.Were you alive during the Epression. No. you talk is
> what you read in books or heard from other people.You talk through
> your butt. You are correct in not listrening to any Congressman.
> However, if you dont believe that Tzar Obama and assistant Tzar Emanuell
> want Socialism and a trade war, you should clean your ears. I am
> from New York and I am sorry to say I voted for Chuck Schumer. Did
> you listen to his news conference. He said, " Americans dont care
> about PORK". I care how my money is spent. I have never been political,
> but know I will work against everything Obama and his socialistic
> team say and do. You ust realise that every day he changes things
> that he said durinng the campaign. He appoints and congress approves
> a Treasury Secretary who has commited crimes against the agency he
> heads.
On Feb 15 06:41 PM ED K wrote:
> Good informative article.
>
> Telling the American public to buy American is not enough.Without
> government action in the form of some kind of higher import tariffs
> to level the playing field even when products from abroad are of
> leeser quality the lower price will win out.This might even generate
> some additional jobs.
>
> I don't think an action of this kind would trigger a trade war as
> many countries already have high import fees.Should'nt our manufacturers
> have a shot at America's buyers??????
On Feb 16 01:05 AM Tedamerica wrote:
> GE will drop to between $5.00 and $7.50 next week. This will be a
> good time for new buyers to make a good, long term investment.
> jack
Can you elaborate on this statement? If is not obvious how ge's foreign assets are likely to become a significant advantage? An advantage compared to what? compared to who? compared to when?
Thanks
GE has great Prospects under the Obama stimulus plan but that aspect is for 2010, the future. Its financial arm is the NOW.
The Dividend promise was made when times were better, If Dow Chemical can drop its dividend for the first time in 96 years, GE would be better served by doing the same. IMO
We have allowed litigation, regulations, work rules, unions, taxes and a host of similar things to become greater and greater burden on the cost to produce things in the United States. At the same time we opened trade agreements, which lowered or ended import duties on the same items, with countries that had little or no regulation, cost of litigation, few or no work rules or unions, taxes, environmental considerations and on and on.
The result is you make it difficult to do business in the United States , while opening the door to business in other countries that make it easy to do business. The result, closed businesses, lost jobs, declining economy. For a short time we enjoyed the lower prices for goods and services from overseas. The trend however accelerated, and people felt that it would keep going, and that eventually we would not have enough economic energy to continue to grow and create enough wealth to have a robust economy. Add doubling energy, and gasoline prices for two years in a row and the camels back breaks.
We can try to re-invigorate housing or re-inflate other industries.. and subsidize energy alternatives, which is helpful, but in my opinion only takes care of 20% of the reasons we reached the tipping point and headed downhill.
The basic faith in the economic system of the United States will not be re-established until we 1). Discuss the reasons for the imbalance of non-free trade, and determine what we are going to do about it. 2). Discuss the cost of energy, and the market factors around supply and pricing and what we can do to create a pricing and supply situation that will provide moderate and stable energy costs, until we can get alternatives working in sufficient amounts to move away from fossil fuels.
My suggestion is that we:
a). Create a US sovereign fund to invest at low interest rates in expanding existing manufacturing or stimulating lost industries to come back to the US.
b). Examine managed economies around the world for good ideas, and unbalanced conditions and balance the playing field as a condition for free trade imports.
c). We should eliminate litigation against manufacturers or cap awards. Create a federal panel of judges to hear complaints and a set package of awards for legitimate claims. Create a 10 year package of environmental rules that will not change, and create a federal environmental board that makes citing decisions that are not subject to legal appeal or lawsuits. Put excellent knowledgeable people on these non partisan boards like we do with the federal reserve. They should be appointed and remain and not be political like current cabinet related posts. Rotate members in and out over time.
d). In order for companies to qualify for being part of this plan, they would have to agree to conditions such as executive compensation limits, green environmental standards, workers bill or rights and agree to provide stock to employees as part of their pay.
We need to do some radical changes to set America back on its feet and be self dependent.
Comments?
On Feb 16 08:21 PM B smith wrote:
> How about some discussion of positive ideas to improve our economy.
>
>
> We have allowed litigation, regulations, work rules, unions, taxes
> and a host of similar things to become greater and greater burden
> on the cost to produce things in the United States. At the same time
> we opened trade agreements, which lowered or ended import duties
> on the same items, with countries that had little or no regulation,
> cost of litigation, few or no work rules or unions, taxes, environmental
> considerations and on and on.
>
> The result is you make it difficult to do business in the United
> States , while opening the door to business in other countries that
> make it easy to do business. The result, closed businesses, lost
> jobs, declining economy. For a short time we enjoyed the lower prices
> for goods and services from overseas. The trend however accelerated,
> and people felt that it would keep going, and that eventually we
> would not have enough economic energy to continue to grow and create
> enough wealth to have a robust economy. Add doubling energy, and
> gasoline prices for two years in a row and the camels back breaks.
>
>
> We can try to re-invigorate housing or re-inflate other industries..
> and subsidize energy alternatives, which is helpful, but in my opinion
> only takes care of 20% of the reasons we reached the tipping point
> and headed downhill.
>
> The basic faith in the economic system of the United States will
> not be re-established until we 1). Discuss the reasons for the imbalance
> of non-free trade, and determine what we are going to do about it.
> 2). Discuss the cost of energy, and the market factors around supply
> and pricing and what we can do to create a pricing and supply situation
> that will provide moderate and stable energy costs, until we can
> get alternatives working in sufficient amounts to move away from
> fossil fuels.
>
> My suggestion is that we:
>
> a). Create a US sovereign fund to invest at low interest rates in
> expanding existing manufacturing or stimulating lost industries to
> come back to the US.
>
> b). Examine managed economies around the world for good ideas, and
> unbalanced conditions and balance the playing field as a condition
> for free trade imports.
>
> c). We should eliminate litigation against manufacturers or cap awards.
> Create a federal panel of judges to hear complaints and a set package
> of awards for legitimate claims. Create a 10 year package of environmental
> rules that will not change, and create a federal environmental board
> that makes citing decisions that are not subject to legal appeal
> or lawsuits. Put excellent knowledgeable people on these non partisan
> boards like we do with the federal reserve. They should be appointed
> and remain and not be political like current cabinet related posts.
> Rotate members in and out over time.
>
> d). In order for companies to qualify for being part of this plan,
> they would have to agree to conditions such as executive compensation
> limits, green environmental standards, workers bill or rights and
> agree to provide stock to employees as part of their pay.
>
> We need to do some radical changes to set America back on its feet
> and be self dependent.
>
> Comments?
On Feb 16 12:39 PM redsea wrote:
> "given the last-minute dilution in the Buy America clause, a good
> portion of those foreign assets are likely to become a significant
> advantage."
>
> Can you elaborate on this statement? If is not obvious how ge's foreign
> assets are likely to become a significant advantage? An advantage
> compared to what? compared to who? compared to when?
>
> Thanks
On Feb 16 09:20 AM john s. gordon wrote:
> re third world countries - we have our own third world country right
> here, it's called appalachia (generically) and west virginia (specifically).
> have you been there?
market cap > $500M
P/E < 7
dividend > 1%
net profit margin > 8%
total debt / asset < 70%
5 year net income growth rate > 5%
52 week price change < -60%
This screen seems to indicate that for the last year, the market has treated GE in a similar fashion as it has the banks, automotive industry suppliers, and Chinese coal mines (I'm not kidding). Despite all the hype, I'm not convinced that GE is in the same sinking boat as these other organizations, regardless of what happens to the rating or the dividend.