C.M.O. 11.19.2009
Credit Market Overview
November 19, 2009
With its current CEO having pulled a lever for John McCain, its previous CEO, who hand picked the current one, having a long history of riding the elephant on election day and the head of its government-relations office having worked for one Ronnie and two Georges; Jeffrey Immelt, CEO of General Electric Co. (GE), could be the last person you might expect to support the government’s current involvement in banking and industry to the greatest extent it has since the ‘30’s.
But, as they say on Wall St.; trade the markets you have; not the ones you wish you had, and it would appear Jeffrey has learned this lesson well and demonstrated as much when he said recently; “We’re all Democrats now”.
It also seems as if J.E. hasn’t completely lost his allegiance to G.G. (a.k.a. Gordon Gecko) as the widening of his circle of friends could put G.E. on the receiving end of about $192BN in government funded projects over the next three years. If, as they say, we all have our price, then Jeffrey has raised that bar to stratospheric heights. After all, what really is the difference between and elephant and a mule?
Not one to wait on the sidelines Mr. Immelt was instructing his troops to form strategies on ways to access various parts of the stimulus package before the current President had his hand on the Bible. Promoting the “smart-grid” proposals, helping customers design projects and apply for government monies have all been part of GE’s efforts.
“The government has moved in next door, and they ain’t leaving. You could fight it if you want, but society wants change and government is not going away.” Is how J.E. put it at a recent economic forum in Montreal. He was later heard to say, “I think we’ll do better than most on the stimulus”.
As much as he might be turning Democratic, Mr. Immelt hasn’t forgotten that it takes money to make money and towards this end the company spent $7.55MM on lobbying efforts in 2Q09, up 34% from the same period a year earlier.
The monies have been spent on promoting projects that would help GE generate revenue but also protect current franchises such as efforts to separate the industrial-loan company, GECC, from the parent and stopping elements in the health-care bill that would levy fees of up to $40BN on medical device makers, of which GE is one.
Although up to 50% of GE’s earnings were a result of its finance sub, GECC, in recent years, events since July of 2007 had put those at risk. Switching to a focus on increasing revenues from its industrial operations might appear the only strategy left but as the adage states; “It’s not the opportunity but what you make of it that counts.” and like any good captain it seems that Jeffrey doesn’t care which way the wind blows as long as it blows and like the truly great captains; the harder the better.
GECC is the entity the CDS market focuses its attention on as there is no market on the corporate parent. After having peaked on 3/5 at 1037bps (talk about a fear factor) default protection levels have come down in almost stair step fashion as the economic outlook and the company’s survivability have improved. Late March through April saw levels in the low 700bps and then it was down to the 400bps for May through most of July. The latest range has been right around 200bps.
During this time the stock has moved from a low of $6.69 (6/4) to a high of $17.01 (9/22) and closed last night at $16.09.
Getting cozy with Uncle Sam is not something new to GE and if Mr. Immelt’s plan works in a few years we could all be saying; “GE, it’s not just about GECC anymore”.
Enjoy the week.
Jim Delaney
