What Does Warren Buffett See in General Electric? 24 comments
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By all accounts, the legendary investor has entered less-than-familiar territory. General Electric (GE) and Goldman Sachs (GS) will most certainly determine whether Mr. Buffett's unique ability to pick business models with substantial inherent upside is still intact or whether the dramatic changes in the global economy are forcing him to fish in troubled waters.
GE's Keith Sherin has just announced a worldwide upgrading of lending standards. But he did not clarify two important and related issues. Will this upgrading, or tightening, of GE's portfolio be founded in a revaluation of the assets which triggered the loans in the first place? And, if so, how will the almost-certain degradation of such assets impact upon GE's AAA rating?
One does not have to dig too deep for the facts; simply take a look at the location of GE's assets, as disclosed on GE's website and in the latest SEC filings. It is apparent that GE's business model incorporates the little known concept of "rating arbitrage". Whereby the vast majority of GE's emerging market assets will not even qualify as BBB- today, GE continues to enjoy AAA status for borrowing purposes in North America.
In other words, if GE's non-US businesses are fully valued in the present global economic environment, on a weighted average basis, country by country, it will be apparent that GE's stock price deserves significant downward adjustment ($10 by early 2009) and the spread on GE's 10-year bond should widen decisively. So where exactly does Warren Buffett see the value in GE?
Ten days ago, Mr. Buffett stated that "GE is the symbol of American business to the world." The problem is that there has been a seismic shift in the fundamentals which defined "American business" and, more importantly, the relationship of "American business" with the global economy. In the briefest of terms, the challenge today is to ascertain whether GE's worldwide diversification policy remains a valid proposition. It will be interesting to see Warren Buffett's analysis in this regard.
Warren Buffett's other recent investment, Goldman Sachs, is also struggling to identify the validity of its business model in a climate where expanding risk spreads, and the uncertainties surrounding those spreads, are bound to severely constrain core investment banking products, like default insurance swaps, hedge contracts, securitizations and arbitrage activity.
But going to back to GE, there is very little information on the asset-to-liability maturity mismatches on its balance sheet and, arguably, without that information it is extremely difficult to figure out what constitutes a fair reflection of credit quality. Perhaps the rating agencies are in possession of information which is not in the public domain.
Disclosure: Short GS.
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This article has 24 comments:
The fact is I am having trouble finding good short candidates because most stocks are soooo..... oversold right now. Good Luck and I hope we all come out alive.
As far as the article goes, did anyone learn anything from it?
1."American Business" is as highly regarded as "American Bank"
2. For too long Buffett has mistook a huge long term bull market for stock picking skills..buying a dip was no brainer ..just sit on it long enough.
..watch his stock now.
..
Consequently, if, upon waking, you made a point to try and catalog every product that GE had an impact in your daily life, you'd see that it was no Yahoo! or Potash or Transocean or whatever dumb pick of the day people are touting all of the time. Light bulbs, heavy engine turbines, medical imaging equipment, GE's presence is everywhere. They have a 9 month, 180 billion dollar backlog. What else do you need to prove value today, a solid block of gold the size of the Chrysler building?
I've been as bearish as the next guy, but I never suggested we should abandon the car and take up the horse. When you hear people are shorting General Electric, that's when you know the market is really oversold. Its a Dow 30 component, many institutions held it for collateral, their brokers sent out margin calls, and forced redemptions sent GE shares out onto the marketplace at irrational prices. The market is not rational. People make fortunes at the inequalities of these irrational prices.
Listen, if I am standing in front of a grain elevator and I say to you, make a bet as to what happens if I open the door at the bottom, an unsophisticated investor will say, grain will fall so I should bet on falling grain. Anyone can bet on that. The trouble is, gravity and equilibrium will stop the falling grain. There is no force, like short selling, pulling the grain out, and if there is, it is like pushing on a string. The bet to make is that the grain will come out of the elevator and more than likely, some farmers are going to start loading up the grain elevator so the product doesn't spoil. That is what is called having a long term. The short term could seem like a long time, like a school day seems to a third grader. Seasoned professors know the semester flies by.
Also,Buffett didn't go out and buy shares of GE, he got a sweetheart deal that you and I cannot get. The same is true of Goldman... Heck! My credit card rate is lower than the interest that Buffett is charging either company and I don't have the right to buy shares in BofA 'in perpetuity' either...
jegan ;-)
If I were short the stock, I would certainly be making unsupported statements to the effect the stock will halve in value by next year. Flog if long, flame if short.
I bought at $20.01 and am thrilled to have done so.
Short anything at your own peril with prices like these. Soon the shorts will be crushed by a big bounce back rally as investors rediscover their nerve.
Give us a break!!
October 10, 2008
seekingalpha.com/artic...
......However, GE today is one of the most shorted stocks in the marketplace; three-month put options at $17.50 and $15 respectively are highly recommended.
When you do this you see that GE's bank is extraordinarily conservative relative to other banks (1/7 leverage vs. 1/11 and higher for well capitalized banks).
You see that the industrial business is the best in the world, exhibiting the highest returns on assets and growth out there, with a excellent portfolio of businesses including everything from train engines, to water infrastructure which are going to be huge for the next several decades.
Then you've got NBC, while I think it has become an embarrassment to GE's name and should be spun off, it nevertheless is generates enormous amounts of free cash flow.
At $20 a share and a dividend yield of 6.2%, its a massive buy if you have a year or so time horizon.
Who else matches his returns over long term horizons? He has been doing this for 40 years.
I doubt you are right on this one. Even if GE does go to 10, which it won't, Buffett would back the truck up to loan on more.
...unemployment rate could climb to "north of 9" percent, Gates told more than 1,500 alumni at the school's Centennial Global Business Summit.
........Going forward, Immelt said, GE could become a buyer of later-stage technology companies initially backed by venture capital. "I think there will be a great opportunity to scale up companies," he said.
www.boston.com/busines.../
Underscoring the daunting challenges confronting policy makers, Gates described a phone conversation he had Sunday night with his friend Warren Buffett, the legendary investor who was mentioned by both presidential candidates in last week's debate as a potential choice for treasury secretary in the next administration.
"I said, 'Well, I'm glad it was you and not me,' " Gates recalled, drawing laughter from the business school alums.
As far as trying to figure the net worth of the company, I bought in over the summer at 32, watched it rocket to 38, and I didn't sell it. So now it's 20, boo hoo - what's wrong with GE ???? Easy - same thing that is wrong with every other stock that has dropped 40% over the last 3 months - NOTHING.
This isn't a broken 'company', it's a broken 'stock'.
Still don't understand why GE wants to keep ownership of NBC, such a bias news outlet that piss-off people all the time. Some women even boycott GE products because of NBC's bias.
The author is short GE. His case is GE operates in many emerging countries and sells to or finances non-investment grade companies. Therefore, GE should not carry an investment grade rating.
This makes no sense. It does not take into account, among other things, which business unit is involved, what product is sold and for what purpose, and the price and terms of the contract. Using this logic, every bank in the US, including JPM, BAC, C and others, should carry non-investment grade ratings.
The financial business unit has many of the risks of a bank. It borrows short and lends long. Liquidity is always a risk in current conditions. Leveraged loan exposure is likely large. Credit quality will decline as recessionary conditions take hold.
None of this means that GE is not sufficiently capitalized to pursue business opportunities nor absorb short-term credit losses in its financial portfolio. As a non-bank, GE can also do things that regulated banks cannot do which may make recoveries better in the long-run.
Buffet got a sweet deal that protects a good portion of his downside. While there may not be an immediate, short-term catalyst to drive the share price higher, GE has tremendous franchise value in all of its businesses.
Maybe the author should cover his short position while he can?
I like the 4 year ge bonds around 7% and will hold to maturity. I am hoping Warren is right in that they won't go bankrupt in which his preferred stock is then worthless.
www.marketfolly.com/20...
His largest single holding is Coca-Cola.
It is flat out amazing how many "pillars" of American business are getting hammered in this bear market and the degree to which many are being pounded to dust. To big to fail? I think not.