Monday, November 12, 2018

Ugh, equity market has an ugly start to the week... GE's troubles...

Concerns about new Apple Iphone sales volumes being below expectations, a fiasco in Malaysia for Goldman Sachs, and gloom from the new GE CEO all contributed to a significant equity market decline today.  Bond markets were closed for the holiday.

GE keeps spiraling down.  CEO Culp was interviewed on CNBC this morning before the open.  There was one stunning statement that woke up this former banker.  Culp stated that GE had $40 billion in back-up bank lines and they had only dipped into them for $2 billion.  Back up lines are just that, meaning that they are in place to reassure creditors that a company will always be viable as a counterparty and all trade letters of credit guaranteed.  Any dip into these lines is a bright red flag.  I mean, how stupid is the CFO of this company to allow this to happen at all, or was it desperately needed.  Either reason is not good.  Culp made the mistake of talking about the stock price, rarely a good idea for a CEO.

Upon questioning Culp said all existing liabilities are manageable but being closely monitored.  That is code for Long Term Care Insurance, which GE capital was a leader in.  When divesting major parts of GE Capital, the company could not sell a significant part of this portfolio, and is managing it in-house.  The tail risk of this type of insurance is immeasurable, and seemingly always underestimated at GE.  Actuarial tables don't tell the story, as people who bought this type of relatively costly insurance generally had good reason to believe that it would be needed.

GE was once a uniquely successful conglomerate under the egomaniac Jack Welch's reign of terror.  Under Jeff Immelt, all investor goodwill accumulated under Welch was wasted through many flawed acquisitions that kept the attention seeking Immelt in the headlines.  Flannery was a bookmark.  Culp has a huge challenge.  At some point GE will be investable, not there yet.

Apple's news rippled through technology stocks broadly, and recently acquired "winners" here like ON, AMD, and ROKU did not fare well.  This type of activity in technology stocks does not bode well for Asia markets tonight.  No projections here, trading some but mostly just watching.


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