May 25, 2024

General Electric’s tactics incite panic

General Electric’s plan to raise $12 billion in capital via a common stock offering and a $3 billion sale of preferred stock to Warren Buffet normally would seem to be a prudent move to raise liquidity in a very uncertain economic environment.  Instead investors reacted by treating GE to a 10% loss on the day, ranking GE as the largest loser of the 30 Dow Jones stocks.

Such is the state of panic that the market is in when one of the few companies left with a triple A credit rating is viewed with suspicion.  It was very easy, however,  to conclude that something is quite wrong with the massive $700 billion GE Capital loan portfolio if GE had to pay an almost sub prime type rate of 10% on the preferred stock sale and, in addition, sell $12 billion of stock when the stock is trading at almost a 10 year low.   Making the stock sale look even more urgent is the painful fact that GE has been buying in stock for years at considerably higher prices than they are now selling it for.   Also, if GE really had no trouble raising money in the commerical paper market at 3.5%,  why would you borrow at much higher rates??  With two recent earnings warnings, one has to wonder exactly what is in the $700 billion loan portfolio, how much of it is lent long with borrowed short term funds and what type of losses will ultimately be incurred.

It is statistically stupid to conclude that Warren Buffet is not making another smart investment assuming that, as in the past, this financial panic will end and those buying now will be greatly rewarded with gains in the future.   My take is that there will be greater bargains and a better time to buy for the patient investor – maybe that day will be when we see a cover story from a national news media proclaiming the “death of equities”.