I know Tommaso,, I'm a little (lot) bored with the BC stuff myself.
anyway wasn't someone bringing up GE on here a little while back?
<<"People aren't remotely cognizant of the potential for collateral damage in all of this."
Barron's Online
September 14, 1998
By Kathryn M. Welling
"Riddle me this," said the voice on the phone, and we humored him. Why not? His biggest
failing, from a journalist's admittedly narrow perspective, is that he's publicity-shy. Then, too, the
fellow on the other end of the line time and again has proven himself an extraordinarily perceptive
and adept investor, locally and globally, long and short, with funds public and private, ever since
fortuitously reporting for work on Wall Street practically in unison with the late, great bull's early
'Eighties arrival. He's not only refreshingly appreciative of his luck, he doesn't waste time with
idle musings.
His question: "What do you get when you merge Long-Term Capital Management with ABB Asea
Brown Boveri?"
He had us. Long-Term Capital, of course, is the misnomer of a moniker adopted by a hedge fund
run by an erstwhile Salomon Brothers master of the universe, John Meriwether. The one that last
week owned up to blowing through a couple of billion of its partners' capital -- in August alone.
Asea Brown Boveri is the giant Swiss-Swedish combine with arms in electrical engineering,
infrastructure, industrial equipment, transportation -- just about every heavy-duty line of business
that's turned to dross, in another words, since global markets started submerging with a
vengeance. Not surprisingly, Brown Boveri has taken almost as big a hit to its market cap, off
about 40% from its June high.
"A global margin call?" we ventured, grasping at straws.
"Want a clue?" our friend shot back. "Some people say, 'It brings good things to life.' "
Barely waiting for us to register astonishment, he dug in his claws. "That enormous sucking sound
you hear is global liquidity disappearing. Which means that John Meriwether's company -- and
who knows how many other financial intermediaries -- are essentially bust. And with Asia, Latin
America -- who wants infrastructure businesses? So explain, please, how General Electric, which
gets 50% of its earnings from GE Capital -- a hedge fund in drag -- still has a $250 billion market
cap and is selling at roughly 30 times earnings, seven times book and three times sales."
"Come on, 'a hedge fund in drag'?" we demurred.
"Absolutely. I know, like the ad for his book says, 'He is arguably the most effective and most
admired CEO in America today.' But what Jack Welch has built, basically, is the biggest hedge
fund in the world. How else do you think GE always manages to report earnings within a penny of
his estimates? The chances of doing that, like GE has done for the last 15 years, are about as high
as Hillary Clinton turning a grand into $100,000 speculating in cattle futures. We know these types
of phenomena are not found in nature. There is no question that the guy has had a huge portfolio of
unrealized gains in the hedge fund-GE Capital. He's just trotted them out, quarter by quarter, in
sufficient quantity to manufacture the expected quantity of earnings."
"So now there's something wrong with taking profits," we taunted.
"Only that it's a bull-market phenomenon if there ever was one. Once the capital-gains portfolio
starts running a little bit dry, Welch has a problem -- and GE can't sustain a 30 multiple. Look
what's happened to all the other financials -- everything from Lehman and Bankers Trust to
Citicorp and Merrill. They're all off 40%-50%; they're 8 to 10 multiple businesses in this
environment -- maybe closer to four times, for the 'purer' hedge funds.
"Well, financial engineering is half of Welch's business -- be generous, say it's worth 10 times.
Give the other half of the business a 14-15 multiple of expected earnings, like Asea Brown
Boveri's. Which means, at best, GE should be trading at 12 times the consensus estimate of
$2.80. It's a $33 stock -- and that's not even allowing for a Meriwether-type debacle or an Applied
Materials-like backlog shrink!"
Ignoring our gasps, he plunged on to sketch some broader implications. "So tell me, why are all
the active portfolio managers tearing their hair out? Because there are about 20 stocks in the S&P
that are still up 50%, and virtually everything else is down. If you're an active manager, you live in
fear now. You wake up in a cold sweat at night if you don't own GE. You can't make an
intellectual case for GE. But it goes up. Because it is in the index and is supported by the mindless
buying of the index funds. No wonder there are so many closet indexers. Look at Fidelity. They're
all over the latest issue of Money, essentially admitting that they've seen the error of their ways and
become closet indexers. At just the wrong time. Because guess what. Just like the index funds
mindlessly bought on the way up, they're going to mindlessly sell on the way down. People aren't
remotely cognizant of the potential for collateral damage in all of this."
That's where he abruptly cut off our conversation to okay a trade. Short, in case you're
wondering. U.S. stocks, the dollar and the yen, too, against the D-mark. >>> |
