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GE: Master arbitrageur

March 9, 2009

fish“Give a man a fish: feed him for a day. Teach a man arbitrage: feed him for a lifetime.”

General Electric CEO Jeff Immelt learned his lesson well. Rocky reckons that GE shareholders just made a cool $250 million because of Immelt’s arbitrage prowess.

On Friday, GE announced a $1.45 Billion debt buyback. That debt was yielding around 9%.

Today, GE sold $8 Billion of FDIC-backed notes. The new debt (courtesy of the US Government TLGP guarantee) costs around 2%.

Fannie Mae and Freddie Mac used to be called GSE’s (government sponsored enterprises). Now that Fannie and Freddie are kaput, Rocky suggests that we drop the “S” from “GSE.”

[Disclosure: Rocky continues to nibble at shares of GE. And he thanks Mr. Immelt for his entrepreneurial efforts.]

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  1. masteroftheuniverse
    March 9, 2009 at 8:03 pm

    Rocky,

    GE continues to be an enigma.

    Jeff

  2. JT
    March 10, 2009 at 8:13 am

    GE will remain an enigman as long as it values 2% of GE Capital’s assets at market-to-market and the remaining 98% (of $624 billion) to its own liking.

    Also, as long as you have the government sticking its finger in favor of debtholders the stock should remain under pressure…and of course the opportunities to deleverage the balance sheet shall diminish in the same proportion.

    I’m afraid Rocky will keep nibling “GSE” for quite awhile.

  3. March 10, 2009 at 9:01 am

    JT: Rocky appreciates your visit to the blog, and thanks you for your comment.

    Rocky believes that the entire mark-to-market debate is a tempest in a teapot.

    Rocky pays his home mortgage on time, and his home is not for sale. Hence it is entirely irrelevant (to Rocky) what his house would sell for — in a forced liquidation scheduled for this afternoon. Likewise, GE has a portfolio of world-leading businesses that will produce substantial cash flows over the next decade. So long as GE is able to meet its current obligations, the analogy is apt. (Additionally, given the loss of market cap, Mr. Market is currently valuing GE’s Level 2 and Level 3 assets AT A NEGATIVE VALUE.)

    If, however, GE defaults on its obligations, then JT’s comments are entirely relevant, and the equity may be worthless.

    As for the Government, Rocky wishes it would stick its fingers back “where the moon don’t shine.”

  4. Mike
    March 11, 2009 at 6:47 am

    Have you checked GE’s default probabilities on its obligations as priced by CDS?

    Check it out…

  5. March 11, 2009 at 7:16 am

    Hello Mike:
    Thank you for your comment.

    Here are the GECC 5 year CDS numbers:
    2/16/09 417 basis points
    2/23/09 612 basis points
    3/02/09 794 basis points
    3/05/09 1037 basis points
    3/10/09 749 basis points

    GE cut their dividend on 2/27 (which should have been a credit enhancing event), yet the CDS deteriorated sharply thereafter.

    The recent price correlation between GE stock and GE’s CDS is about 0.82

    Rocky therefore concludes that the CDS market does not provide any addtional insights — other than the fact that CDS traders are like “A scared blind man looking in the mirror.”

    Can GE go bankrupt? Yes.

    Do GE’s Credit Default Swaps provide any additional insights about the probability of that happening (as compared with the price of GE common stock)? No.

    Over the next decade, GE will either be a goose-egg. Or it will be a $30-$40 stock. But it won’t be an $8 stock. Hence Rocky owns GE stock with a “stop” at zero. He has a speculative trading position. And he has a long-term investment position.

  6. allocator
    March 11, 2009 at 9:19 pm

    There have been 11 insider buys in March totalling over $2.5M, including 50,000 shares purchased by Immelt. It may be orchestrated and cosmetic, but at least they seem to be pulling out all the stops to turn this thing around.

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