Vikram Saxena

General Electric: Genuine Risk of Collapse?

This article has a lot of useful information, but the author's judgment seems to be clouded.

(1) The author asks why the AAA company had to use Federal facilities! Does he have any clue about the status of the credit markets?
(2) The author questions GE's share buyback program. Did he short S&P Futures in October last year? Very few people except the perma-bears would have predicted the worst year ever for the US stock market.
(3) The author questions why GE agreed to pay Buffett 10%. The author seems to be living in alternative world where he does not understand how Mr. Buffett's imprimatur helps a company; in the case of GE it allowed them to sell common stock and raise more capital.
(4) The author wonders how GE will roll over its long term debt. GE can continue to raise short-term debt via the Fed's commercial paper facility, till the credit market improves.
(5) The author sees GE's efforts to get its customer to pay loans back faster and reduce its balance sheet as a sign of weakness, and not as prudent action in the time of a credit crunch. The irony couldn't be more obvious: the author is critical of GE because of their leverage; but also critical of their efforts to cut leverage!

I have not analyzed GE enough to say whether GE deserves AAA or not. But the obvious slant in your article hurts your credibility. A shorter article with a focus on the financial metrics which deserve scrutiny would have been more effective in making your case instead of this tome with speculative arguments. Plus calling Mike Shedlock, "a brilliant financial analyst" really destroys the author's credibility. If Shedlock has his way we will be back to the Gold Standard and instead of fighting for oil which at least has a utility value, we will be fighting war for Gold which has very little utility value beyond certain industrial applications. What we need are well defined regulations which are followed and enforced to ensure accountability and reward for carrying risk, not just for pushing risk to the next guy.

Housing, Credit, Economy: At an Inflection Point

Kunst and ericinNE:

Thank you for your comments.

1. There are several federal programs in the pipeline which will help real home-owners who want to stay in their homes refinance to fixed rate products. This being an election year things are likely to move quickly in DC.

2. A sub-prime home owner with a few years of steady mortgage payments will no longer be sub-prime. Credit scores do improve quite rapidly from the bottom for people with a good mortgage payment history.

3. The other big factor in any debt crisis is time. With time wages and income creep up, improving the home owners ability to pay their mortgage. Time will also heal balance sheets, especially when the mark downs in banks have been extremely aggressive.

Housing, Credit, Economy: At an Inflection Point

Basic Finance:

Yes indeed. We are going to see more bad news.

However the equity market is a future discounting mechanism. They will be priced based on what people see 6 to 9 months ahead. The underlying causes of this cycle's slowdown are gradually healing.

That is why I feel that the low we will see in equities after this quarter's earnings would be very likely the low for this bear market.

Housing, Credit, Economy: At an Inflection Point

Rhett:
My article clearly states that home prices will continue to fall at least till the end of this year and then form the bottom U over the next two years.

jayz:
The article you linked to does not take into account interest rates. Just because a mortgage resets, does not mean that the rate will go up. With LIBOR around 2.60%, the rate will go down after resets. This was different than much of 2006-2007 when LIBOR was 2-3% higher.

Further, the ABS market has already priced in the 2006 and 2007 vintage which will reset in the future with a big discount.
www.markit.com/informa...

The AA tranche of 2007 vintages are trading at around 21c/dollar. That means that market expects a huge amount of principal loss on these mortgages.

Housing, Credit, Economy: At an Inflection Point

As Arts pointed out, and I expanded upon in my comment, an inflection point is not the bottom. It marks a change in the rate (second derivative). That is exactly what I have written: that things will become worse before they get better and I expect the graph to look somewhat like the graph of x^3.

upload.wikimedia.org/w...

en.wikipedia.org/wiki/...

Earnings are going to be bad this quarter and the outlook cautious. House prices will fall further as more sellers capitulate.

However, the fundamental factors which caused these slides in the first place are showing signs of bottoming (sub-prime, credit crunch, lower wages etc.). It will take some time for the effects of these to go through.

It is the gap between these two events, the potential washout after the earnings, and the recovery, which will be the best time to go long US equities.

User169490: Though NAR has its own agenda, it is still worthwhile to compare the numbers, especially a derived number like affordability index which is based on publically available data. You can not dispute that home prices are coming down, the interest rates are much lower than an year ago, and nominal wages (not discounted for inflation) are up. The same NAR affordability index was flashing signs of distress during the peak of the boom.

Housing, Credit, Economy: At an Inflection Point

Arts:

Thanks for your comments.

en.wikipedia.org/wiki/...

Things are going to become worse before they get better.

I fully expect this quarter's earnings to be hurt by the credit crisis and expect some sort of capitulation in the equity markets (a big down day/a test of the lows).

Similarly home prices are going to go down further, and faster as sellers start lowering prices after holding on for a long time and foreclosures dominate sales.

However, both these actions are cathartic and will result in something similar to this curve:
en.wikipedia.org/wiki/...