Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Dow Long-term Trend Analysis - Coronavirus Triggering a Stocks Bear Market? - 27th Feb 20
Trump or Sanders? Both will pile up the Debt - 27th Feb 20
Oil Price Is Now More Volatile Than Bitcoin - 27th Feb 20
A Digital “Fedcoin” May Be Coming… And It Would Be Terrifying - 27th Feb 20
India's Nifty 50 Stocks: Does the Bad Jobs Outlook Spell Trouble for Stocks? - 27th Feb 20
How Crypto Currencies Are Helping Players Go Private - 27th Feb 20 -
Gold and Silver The Die Is Cast - 27th Feb 20
US Economy Permanently Addicted to Zero Interest Rates - 27th Feb 20
Has the Stock Market Waterfall Event Started Or A Buying Opportunity? - 27th Feb 20
Advantages of Enrolling in a Retirement Plan - 27th Feb 20 - LS
South Korea Coronavirus Outbreak Data Analysis Warning Rate of Infection is Exponential! - 26th Feb 20
Gold Price Long-term Trend Analysis Forecast 2020 - 26th Feb 20
Fake Markets Are on Collision Course with Reality - 26th Feb 20
Microsoft is Crushing the S&P 500, Secret Trait Of Stocks That Soar 1,000%+ - 26th Feb 20
Europe's Best Ski Resorts For The Ultimate Adventure - 26th Feb 20
Samsung Galaxy S20+ vs Galaxy S10+ Which One to Buy? - 26th Feb 20
Gold Is Taking on $1,700 amid Rising Coronavirus Fears - 26th Feb 20
Is This What Falling Through the Floor Looks Like in Stocks? - 26th Feb 20
Gold Minsky Moment Coming - 26th Feb 20
Why Every Student Should Study Economics - 26th Feb 20
Stock Market Correction Over? - 26th Feb 20
US Bond Market Yield Curve Patterns – What To Expect In 2020 - 25th Feb 20
Has Stock Market Waterfall Event Started Or A Buying Opportunity? - 25th Feb 20
Coronavirus IN Sheffield! Royal Hallamshire Hospital treating 2 infected Patients, UK - 25th Feb 20
Dow Short-term Trend Analysis - Coronavirus Trigger a Stocks Bear Market? - 24th Feb 20
Sustained Silver Rally Coming? - 24th Feb 20
Should Investors Worry about Repo Market and Buy Gold? - 24th Feb 20
Are FANG Technology Stocks Setting Up For A Market Crash? - 24th Feb 20
Gold Above $1,600 Amid FOMC Minutes and Coronavirus Impact - 24th Feb 20
CoronaVirus Pandemic Day 76 Trend Forecast Update - Infected 540k, Minus China 1715, Deaths 4920 - 23rd Feb 20 -
Ways to Find Startup Capital - 23rd Feb 20
Stock Market Deviation from Overall Outlook for 2020 - 22nd Feb 20
The Shanghai Composite and Coronavirus: A Revealing Perspective - 22nd Feb 20
Baltic Dry, Copper, Oil, Tech and China Continue Call for Stock Market Crash Soon - 22nd Feb 20
Gold Warning – This is Not a Buying Opportunity - 22nd Feb 20
Is The Technology Sector FANG Stocks Setting Up For A Market Crash? - 22nd Feb 20
Coronavirus China Infection Statistics Analysis, Probability Forecasts 1/2 Million Infected - 21st Feb 20
Is Crude Oil Firmly on the Upswing Now? - 20th Feb 20
What Can Stop the Stocks Bull – Or At Least, Make It Pause? - 20th Feb 20
Trump and Economic News That Drive Gold, Not Just Coronavirus - 20th Feb 20
Coronavirus COVID19 UK Infection Prevention, Boosting Immune Systems, Birmingham, Sheffield - 20th Feb 20
Silver’s Valuable Insights Into the Upcoming PMs Rally - 20th Feb 20
Coronavirus Coming Storm Act Now to Protect Yourselves and Family to Survive COVID-19 Pandemic - 19th Feb 20
Future Silver Prices Will Shock People, and They’ll Kick Themselves for Not Buying Under $20… - 19th Feb 20
What Alexis Kennedy Learned from Launching Cultist Simulator - 19th Feb 20
Stock Market Potential Short-term top - 18th Feb 20
Coronavirus Fourth Turning - No One Gets Out Of Here Alive! - 18th Feb 20
The Stocks Hit Worst From the Coronavirus - 18th Feb 20
Tips on Pest Control: How to Prevent Pests and Rodents - 18th Feb 20
Buying a Custom Built Gaming PC From Overclockers.co.uk - 1. Delivery and Unboxing - 17th Feb 20
BAIDU (BIDU) Illustrates Why You Should NOT Invest in Chinese Stocks - 17th Feb 20
Financial Markets News Report: February 17, 2020 - February 21, 2020 - 17th Feb 20
NVIDIA (NVDA) GPU King For AI Mega-trend Tech Stocks Investing 2020 - 17th Feb 20
Stock Market Bubble - No One Gets Out Of Here Alive! - 17th Feb 20
British Pound GBP Trend Forecast 2020 - 16th Feb 20
SAMSUNG AI Mega-trend Tech Stocks Investing 2020 - 16th Feb 20
Ignore the Polls, the Markets Have Already Told You Who Wins in 2020 - 16th Feb 20
UK Coronavirus COVID-19 Pandemic WARNING! Sheffield, Manchester, Birmingham Outbreaks Probable - 16th Feb 20
iShares Nasdaq Biotechnology ETF IBB AI Mega-trend Tech Stocks Investing 2020 - 15th Feb 20
Gold Stocks Still Stalled - 15th Feb 20
Is The Technology Stocks Sector Setting Up For A Crash? - 15th Feb 20
UK Calm Before Corona Virus Storm - Infections Forecast into End March 2020 - 15th Feb 20

Market Oracle FREE Newsletter

Coronavirus-bear-market-2020-analysis

GE's Restructuring Pleases Investors and Avoids Other Risks

Companies / Corporate News Apr 22, 2015 - 10:38 AM GMT

By: John_Browne

Companies

On April 10, General Electric, which for 123 years has been one of America's best known and most highly respected companies, announced a radical return to its basic industrial roots. After years of disappointing share performance, and a campaign of criticism by frustrated investors, Chief Executive Jeff Immelt decided to spin off most of its $500 billion GE Capital arm which, if taken as a stand-alone company, would have been the seventh largest bank in the U.S.


Despite the fact that the unit had contributed some 42 percent to GE's group profits in 2014, the financial unit had nevertheless become a perceived albatross around the neck of the industrial conglomerate. The move greatly pleased investors, who rewarded the stock with one of its best days in years. The question we should be asking ourselves is why is it so undesirable to be a bank in the United States? What does that say about the underlying strength of the economy?

In the financial crisis of 2008/09, GE Capital, like all the other major financial firms, had to be rescued from insolvency by the government's TARP or Troubled Asset Relief Program. In the aftermath, GE was branded, as was other large non-banks like AIG, MetLife and Prudential Financial, as a SIFI, or Systematically Important Financial Institution, and thereby 'too big to fail'.

This categorization exposed GE to a whole new wave of supervision by the Federal Reserve Board and a host of new regulations under the new Dodd-Frank law. This put the firm at a competitive disadvantage against the U.S. markets in general, and other industrial firms in particular. In fact, from its pre-recession highs in May of 2008, GE was off about 20% in the more than six years leading up to this month's announcement. Over the same time frame, the Dow Jones Industrial Index (of which GE is a part) was up about 36%, with shares of such rivals as United Technologies up much more. This substantial gap caused considerable frustration among GE management and shareholders. GE had performed more like a financial firm (the S&P 500 Financial Sector lost about 12% over that time frame).

Shrewd investors have long believed that 'core competence' is key to success. GE's core competence was as an industrial company building advanced aircraft engines in direct competition with Rolls Royce, power turbines and a whole raft of electrical products including advanced medical devices. Some investors saw GE's foray into finance, mortgage lending, and credit cards as a dangerous departure. In addition, investors have long seen financial earnings inherently as considerably more risky than industrial earnings. As a result, investors assigned a lower value, or price earnings ratio, to financial companies' earnings. On the face of it, these factors gave GE good reason to divest its Capital division.

But while those questions are still theoretical, GE shareholders are looking at some tangible benefits. The company has authorized that over the next four years it expects that more than $90 billion that is realized from its asset divestitures will be directed expressly towards shareholders. Some $35 billion in the form of increased dividends, while $50 billion in the form of share buy backs.

In addition, GE's plan involves repatriating some $36 billion from cash-rich subsidiaries overseas and the payment of an additional $6 billion in U.S. taxes, a tax rate that is significantly higher than what has been the norm at the firm for much of recent history. In the past, high-spending politicians have criticized GE, and many other corporate icons, for their overly efficient tax planning. The move to pay a huge tax bill now may blunt these critiques. But, apparently, optimism about the future of U.S. corporate tax policy is not running high at GE. If it were, planners may not have been so eager to pay such a steep price to move such a large block of cash onshore. GE's thinking should throw cold water on those who may have thought that a common sense corporate tax reform program is high on Washington's agenda.

It appears that Immelt was prepared to accept a $6 billion tax bill and the loss of almost half his revenue in order to get out from under the stigma of financial services and the huge weight of supervision and regulations required of a SIFI firm. But sometimes expensive divorces are worth it.

However, lost in the celebration of the return of an American icon to its industrial roots are some troubling factors that may have inspired the decision. If one looks past current narrative of a resurgent U.S. economy, worrying signs of recession have recently come to light. The recent deceleration, combined with the implementation of potentially onerous regulations under Dodd-Frank and signs of increasing stress in the consumer and corporate debt markets, may have helped GE to decide to get out of the lending business while the going was good. In hindsight, the move may look extremely prescient.

But one major question remains. The Fed has given no indication of just how a SIFI company, such as GE, can shed this status once branded. In essence, GE is paying a high price to avoid regulators who may refuse to go away. Once taken, government agencies are loathe to give up regulatory power. Often these fights become completely irrational, with bureaucrats fighting for little more than prestige. Hopefully this will not happen to GE, and the Fed will take the high road and let GE go on its merry way. I wouldn't be so sure.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, Michael Pento, and John Browne delivered to your inbox every Monday.

By John Browne
Euro Pacific Capital
http://www.europac.net/

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc.  Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with."  A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

John_Browne Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules