While the broader market has managed to see a decent relief rally today on the heels of overseas gains, it is being held back by GE (and now weakness in other financials), which is -10% at 6.33 after setting fresh 17-year lows earlier in the day on continued capital concerns.
Although GE has historically been thought of as a major industrial company, its massive finance arm GE Capital has dragged it down with the most troubled financial stocks. Last week, in a move that had been widely expected, the company confirmed that it would reduce its quarterly dividend to $0.10 from $0.31 in order to save $9 bln per year.
Despite the efforts to preserve capital, investor fears have accelerated this week, as the stock has plunged further, CDS spreads have risen sharply and put option buyers have become much more aggressive.
GE's stock is down 24% so far this week, now at the lowest levels in over 17 years. Its credit default swaps (CDS) have widened sharply, illustrating the soaring cost to insure against a GE Capital debt default (the analyst community has widely argued that GE Capital wouldn't bankrupt GE).
Additionally, there has been aggressive put buying on GE, with heavy activity stretching all the way down to the $2.50 strike in March, indicating very bearish near-term positioning in the options market.
The factors weighing on GE are directly attributable to the unknown amount of losses out of GE Capital (with some expecting as much as ~$20 bln) and the obvious capital requirement implications.
The next immediate concern is that the co will lose its AAA status. While a debt downgrade would not come as a total surprise (Moody's warned they were reviewing GE for possible downgrade last week), in preparation for the possible downgrade event big holders of GE securities are forced to sell positions, which in turn sends a negative signal to the market, regardless of the motivations. Finally, there is the possibility that the remaining dividend will need to be eliminated (which could actually be viewed as a near term positive as it would act to preserve capital).
Against all of the bearish market indications, the company has remained defiant, publicly denying speculation that it will be required to raise new capital near term and announcing that it has a strong capital position with ample liquidity.
Additionally, several insiders purchased a total of $1.4 mln worth of stock this week, in what appears to be a collective effort to shore up confidence (specifically, GE CEO Jeffrey Immelt, 2 Vice Chairmen (including the head of GE Capital), and 2 Directors bought 250,000 shares at prices ranging from $6.99-8.26).
The bottom line is that the market is still unsure of the amount of losses out of GE Capital, and the GE story is shaping up similar to what we've seen at other financial firms in question, with management taking efforts to offset the clearly negative market events...
Dow +117, SPX +12, Nasdaq +26.