Dave Gore's Trades That Make Sense Message Board

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Strategies & Market Trends : Dave Gore's Trades That Make Sense

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To: Dave Gore who started this subject	3/21/2002 7:52:26 AM
From: D.Austin	of 16631

We should require some Buffett-like answers. Value and honesty should dominate corporate decision-making. Jack Welch and Jeffrey Immelt have not been totally forthcoming in the explanation for why GE has been able to grow earnings at nearly 15% per year for the last several decades. The fact is that GE is a conglomerate financed by a money machine – its subsidiary GE Capital — but unlike Berkshire Hathaway, its foundation is vulnerable because its survival depends upon the confidence of outside investors. It grows earnings not so much by the brilliance of management or the diversity of their operations, as Welch and Immelt claim, but through the acquisition of companies (more than 100 companies in each of the last five years) using high-powered, high P/E multiple GE stock or cheap near Treasury Bill yielding commercial paper. In the use of that CP, GE Capital is using near hedge fund leverage of 7-8 times at what appears to be (based on its Aaa rating) non-hedge fund risk. But investor comfort and confidence these days is fragile indeed. The $11 billion debt offering was an intelligent recognition of that, but they have tens of billions of unbacked commercial paper that remain. Without the benefit of this leverage afforded to them by the Street, their operations to me resemble more closely the failed conglomerates of yesteryear such as Gulf + Western and LTV. PIMCO will own no GE commercial paper in the foreseeable future. pimcobonds.com While GE Capital enjoys the benefit of a Aaa rating, they nonetheless have commercial paper outstanding which totals three times the size of their bank lines which back them up. Normally companies which borrow in the CP market are required to have bank lines at least equal to their commercial paper, but GE Capital has been allowed to accumulate $50 billion of unbacked CP because of the lack of market discipline. By issuing $11 billion in debt, GE was sensing its vulnerability to the current mercurial opinion of analysts and managers alike, which says that any company had better clean up their act or else suffer the consequences. But Ms. Moretti put a “pro forma” face on it – “rates are historically low” she tried to convince the Journal. Honest Abeline, she is not. -- I have no doubt in my mind Dave you will be able to pick up some cheaper shares of GE..and one more irony in the fire, If Jack Welsh (pun intended)cheats on his wife of 12 years with a prenuptial agreement good for 10 years.Would you trust this guy ???

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