Saturday, May 30, 2020

The spreading debt virus - 5 potential cures for $30 trillion problem

Victor Davis Hanson: The spreading debt virus — 5 potential cures for $30 trillion problem

By Victor Davis Hanson | Tribune Media Services

The current U.S. budget deficit could soon exceed a record $4 trillion. The massive borrowing is being driven both by prior budget profligacy and a hurried effort by the Donald Trump administration to pump liquidity into a quarantined America.

The shutdown has left the country on the cusp of a self-inflicted economic collapse not seen since the Great Depression.

Americans may soon have to service a staggering national debt of about $30 trillion — nearly $100,000 of debt for every American.

Democrats and Republicans can blame each other, either for spending too much or for too little taxation, or both. But both sides will agree that managing such an astronomical debt requires several frightening choices.

One, Americans would be forced to live with permanent near-zero interest rates, or perhaps even negative interest rates.

We are already seeing how the current low interest rates punish those who were thrifty and put away money in savings accounts. Negligible interest rewards those who borrow but forces savers to look for returns in volatile real estate or the risky stock market.

In other words, there would be little interest paid out on the federal debt. The selling point for investors would be that the U.S. at least honors it bonds and debts and is safer than alternative global investments.

America would become a permanent debtor that avoids paying much interest to anyone who lends it ever more money — on the cynical rationale that investors have no other safe place to put their money.

Two, Americans, who are already taxed heavily at the local, state and federal levels, would simply have to pay even more. Top earners might pay a real tax rate of 60 percent to 70 percent of their incomes to government, with deleterious effects on incentives to create or earn further wealth.

Gasoline prices are at astonishing lows, so some have advocated yet another federal fuel tax increase, a national sales tax or a wealth tax on the rich. The problem with constant increases in taxation is the ensuing culture of even greater spending that inevitably follows and the destruction of individual incentive.

Three, the government could make draconian cuts in spending, focusing mostly on entitlements such as Social Security and Medicare, along with defense, where the bulk of federal expenditures are found.

Cutting Social Security and Medicare is usually political suicide. In times of growing tensions with China, Russia, Iran and North Korea, it would equally be foolish to slash defense spending.

We are postponing another rendezvous with reality. But as we near $30 trillion in debt, what cannot go on much longer soon probably won’t.

Four, the government could fall into the bad habits of the 1970s and simply expand the money supply, fuel inflation and pay down the debt with funny money. We would then likely experience the baleful consequences that a prior generation faced with stagflation and curative but staggeringly high interest rates during the Nixon, Ford, Carter and early Reagan administrations.

Rather than fooling with interest rates and the money supply, a mixture of increased revenue and spending cuts seems wiser. Yet both are far harder to enact politically than just letting the Federal Reserve Board adjust national liquidity and interest.

Five, the government could hope that new deregulation and more tax incentives might spur GDP growth of 3 percent or more per annum and thus “grow” our way out of deficits by radically expanding the economy. Such optimism is frequently voiced but rarely has prevented large budget deficits.

A decade ago, the bipartisan National Commission on Fiscal Responsibility and Reform, headed by former Republican Sen. Alan Simpson and former Democratic official Erskine Bowles, charted a pathway out of debt. The commission outlined a holistic plan of gradual cuts and revenue increases. Its wise recommendations found little to no political support.

In the first two decades of the 21st century, the United States has faced three existential crises. The first was the 9/11 terrorist attack on the World Trade Center and the Pentagon, which prompted a global effort to fight radical Islamic terrorism. The second occurred in 2008, when the U.S. financial system and stock market nearly collapsed. The third began earlier this year with the COVID-19 epidemic and a quarantine that reduced the economy to its most shaky state since the 1930s.

During the first two crises, we snapped back the economy with low interest rates, increased government spending and larger annual deficits — and passed the greater long-term debt to another administration, another Congress and another generation of Americans.

We are postponing another rendezvous with reality. But as we near $30 trillion in debt, what cannot go on much longer soon probably won’t

The NYT Libels The Military For Memorial Day - A Disgrace

The NYT Libels The Military For Memorial Day

Posted on May 25, 2020 by Wolf Howling

On the heels of Biden’s textbook racist statement, that, “If you have a problem figuring out whether you’re for me or Trump, you ain’t black,” the NYT does damage control by claiming the U.S. military is “celebrating white supremacy.” It is the single lowest attack from these worthless race hustlers since their 1619 Project attempted to rewrite U.S. history.

I’ll begin this essay with a biographical note. Between my time as a cadet at The Citadel, a military college in Charleston, SC, in the 70’s, and then as an Infantry Officer in the U.S. Army in the 80’s and 90’s, I lived in a fully integrated world, one wholly without the racial politics of the civilian world. That was largely true of Charleston, S.C. as well. In the Army, about a third of my soldiers and a quarter of my fellow officers were black and probably an equal number Hispanic. I saw no hint of racism or reverse racism during my time in those jobs and locales, nor would even a hint of it have been tolerated. Everyone was given the same opportunities and either succeeded or failed based on merit measured against a single standard for success. Period.

My sense was that the military, integrated by order of President Truman in 1952, had been free of racial politics since at least the end of the Vietnam War in 1972. My sense in retrospect, now 20 years removed from the military, is that no institution in America has played a more important or positive role in integrating the United States. My two mixed-race children subsequently joined the military, with my son still in. I have heard nothing to change my opinion of the positive role being played by the military in the years since I left the service.

So for the editorial board of the NYT, the nation’s leading purveyor of toxic racial / identity politics, to accuse the military, on the day before a national holiday honoring those men and women who fell in service to our country, of being a bastion of “white supremacy,” is the single biggest slap in the face to our soldiers that I can imagine. And it is pure bullshit These clowns find a way to find hidden racism literally EVERYWHERE and somehow can’t manage to see it where it actually exists. . . .

So with that intro, let’s take a look at what the race hustlers at the NYT do to slime the U.S. military — and in particular, the Army — on the day before Memorial Day. The name of their scandalous opinion piece is Why Does the U.S. Military Celebrate White Supremacy? The logic of the editorial board is that, because several U.S. military bases in the South were named after Confederate generals over a century ago, that means that today’s military is full of white supremacists. Oh, and the Confederate Flag is the equivalent of a Nazi symbol. It is all one giant, toxic non-sequitur. Given its timing, it is hard to see it as anything other than the NYT looking at Biden, then looking to America, then pointing away from Biden while yelling “squirrel.”

The NYT begins its slander by bringing up the case of Dylan Roof, the young man who, in July 2015, murdered nine blacks in Charleston at the Emanuel A.M.E. Church. Roof posed with the Confederate flag before his murder spree. Enraged by BLM and the Treyvon Martin race fiasco, Roof was attempting to start a race war. All of the inexplicable nuances of Roof, such as the fact that he had several black friends and never showed or spoke of anything racist, are ignored by the NYT, who claim that Roof’s mass murder is proof that the Confederate Flag was not merely an innocuous cultural symbol of the South, but a symbol of “Confederate ideology and a blood-drenched tradition of racial terrorism that dates back to the mid-19th century in the American South.”

There is a tremendously important lesson from the Dylan Roof mass murder — but its not the intellectually lazy point that the NYT editorial board wants to make. In 2015, America was exploding with black violence led by the BLM movement. Anywhere a black person died at the hands of police, BLM was there to fan the riots, from Ferguson to Baltimore and other cities. After the Roof mass murder occurred, BLM agitators descended on Charleston, SC. It turned out that Charleston, SC, a city 25% black in a state that is 29% back and represented by the nation’s only black Senator, Tim Scott, was the only city in 2015 with a huge racial incident that suffered no rioting.

The city, black and white, came together in the wake of the Roof mass murder — as I expected them to, frankly. As then Gov. Niki Haley observed, two months after the murders, “South Carolina didn’t have riots, we had vigils . . . We didn’t have yelling, we had hugs and prayers.” Ironically, I suspect that a large part of that shared feeling of being American, regardless of one’s skin color, likely has a lot to do with the very sizeable portion of veterans and active-duty military who reside in the South, and who reside in Charleston in particular.

The simple fact is that you will find better race relations in the American South than you will anywhere in the U.S. As Ms. BWR wrote of her first visit to the old South in 2015

Speaking of the South and race, I’ve never seen a part of the U.S. that’s as racially integrated as the South. Wherever we went, people of all races dined together, traveled together, worked together, or were clearly dating or married without regard to racial boundaries. . . .

In the South, the races seem to be comfortable to mix-and-match. This integration was so obvious that even the Leftist in our party, who had already delivered a lecture — predicated on the Confederate flag kerfuffle — about the South’s racism, was forced to comment upon the harmony we saw.

When I was at the Citadel, a place where the cadets, in 1861, fired the first shots of the Civil War, the Confederacy and the Civil War were a part of the school’s Southern Heritage. The fight song of the Citadel was Dixie. It was a fully integrated institution and no one looked to the Confederate flag as a symbol of racism or race hatred. The same was true in Charleston itself. For example, there is BBC host Stephen Fry’s interview of a black school teacher, Anita Prather, in South Carolina when he specifically raises the issue of the Confederate flag. The interview starts at 35:16:

Back to the NYT editorial. From the Confederate Flag, the NYT reasons:

This same toxic legacy clings to the 10 United States military installations across the South that were named for Confederate Army officers during the first half of the 20th century.

So a century ago, when the U.S. established permanent bases in the South, they chose the names of generals from the particular states who had served in the war and who had fought with honor. So, for example, in Georgia, the home of the U.S. Army Infantry, my old happy hunting ground, is Fort Benning. Established in 1909, the post was named after a Georgia native and Confederate General, Henry Arthur Benning. From a 2015 Time Mag article:

Both the Army and the South are tradition-bound entities that revere their past. Each of the posts was named for a Confederate officer long after the Civil War, including many in the first half of the 20th Century when the U.S. military was rushing to open training posts for both world wars. Army Colonel Steve Warren, a Pentagon spokesman, said Wednesday there is “no discussion” underway about renaming the posts.

The Army itself stood firm. “Every Army installation is named for a soldier who holds a place in our military history,” Brigadier General Malcolm Frost, the service’s top spokesman, said Wednesday. “Accordingly, these historic names represent individuals, not causes or ideologies. It should be noted that the naming occurred in the spirit of reconciliation, not division.”

And that’s it. That is the whole of the NYT argument that the military, the single most important engine for improving race relations in this country, is “celebrating white supremacy.” Not a single soldier alive today, whether active duty or vet., was even born when these installations were named. I doubt if a single soldier working on any one of those installations today have ever given a second’s thought to the to the name of their respective post. And I am absolutely sure that only the same “clowns” who can “find hidden racism literally EVERYWHERE” are able to find a “celebration of white supremacy” in today’s military because of the century-old names of its posts.

What is really going on here is this: The NYT editorial board and the people like them are worthless pieces of human excrement agitating for one thing only — political power — and they don’t give a rat’s ass if they have to destroy this country and every person in it to get that power. These people are in a zero sum game and are playing to win at any and all cost.

That said, let’s take this one further and follow the NYT argument to its logical conclusion. If any institution that once had a role in promoting racism must now be condemned — or else it is de facto proof of racism and the celebration of white supremacy — then what of the single most destructive, despotic and racist institution in U.S. history. I am speaking, of course, of the Democrat Party — the party of slavery, of Jim Crow, of Woodrow Wilson, the NYT, and Joe Biden. As Andrea Widburg writes at American Thinker:

The Republican Party, which nominated Abraham Lincoln, was formed specifically to counter the Democrat Party’s commitment to slavery. Lincoln’s Democrat opponent, Stephen A. Douglas, owned a Mississippi plantation (in his wife’s name), never condemned slavery’s immorality, and held to a state’s rights view of slavery that would have allowed it to continue in the South and move into new American territories.

After the Civil War, the South remained single-mindedly Democrat up until the old guard of segregationists finally died out. This was the same old guard, by the way, that Joe Biden, the de facto Democrat Party candidate, cuddled up to during his first decade in the Senate.

Indeed, Times glosses over lots of its party’s racist history. For example, as part of slamming the military, the editors praise Truman (a Democrat) for integrating the military. They forget, however, to castigate Woodrow Wilson (a Democrat whose name is all over Washington, D.C.) for segregating the entire federal workforce.

The Times slanders the military, the most integrated institution in America, by resurrecting people whom everyone has forgotten, and about whom no one in the military complains. Meanwhile, the Times’s chosen party is the living embodiment of race-obsessed politics. The Democrat Party ought to have been outlawed in 1865, just as the Nazi party was outlawed in 1945.

Beware of Idols

We had fellowship with our good neighbors Sandy and John. They shared what John wrote regarding the current world situation from a spiritual perspective.

The Spiritual and Unseen Truths Behind

the Physical and Observable Realities of

COVID-19

As we experience this time of great world wide upheaval and uncertainty, it is evident that the global pandemic of Covid-19 has shown us that what societies take for granted can be upended or even destroyed in a matter of days, weeks or months. The fear of death has become a predominant factor in the absence of vaccines, antivirals and others drugs known to treat or cure the disease. This fear factor seems to drive much of the thinking behind public policy.

As Christians and followers of Our Lord Jesus Christ, what are we to make of all of this?

We know that while God may not have directly caused this, He is sovereign over all things. When doubt or fear strikes, we run to the Word of God. I believe that the Bible has some clues as to how we got here, what God’s plan might be in all of this, and what we, as His disciples, must do going forward.

The world is scared, the world has shut down, and the world is a mess! The Bible tells us that this world is currently, albeit temporarily, ruled by the powers of darkness in heavenly places. Ephesians 6:12. As a result, it is not surprising that there is so much conflict and moral confusion. Political turmoil exists at all levels of government. What used to be called evil ( abortion, homosexuality, same sex marriage and the like ) is now called good and vise versa. (Isaiah 5:20). Truth is relative and is really now just a moral construct based on one’s opinion. Basic male and female biology is up for grabs and at the sad expense of some in our younger generation who are lost in gender identity confusion. And most unfortunately, many main line churches have allowed the culture to shape and bend Biblical doctrine to suit their comfort level with sin. The Bible, once considered the inerrant and unwavering truth of God’s Word, is now subject to intellectual assault in the name of “ higher biblical criticism “.

It is true that the world has been assaulted by a microscopic invader that is highly contagious and can cause illness, suffering, great fear, and in some cases, death. ( Covid-19 fatalities are about 5 to 7 percent, depending on the locale and country). But we face a much greater and deadlier invisible enemy pandemic that has been around since the Garden of Eden…SIN. This invader is guaranteed to cause death, 100 percent of the time, to the spirit and soul of mankind.

As good citizens of this world and heirs of the Eternal Kingdom, we are called to love, serve, obey, pray and to do our part to stem this medical pandemic. The Bible reveals that the physical and observable is preceded by the spiritual and the invisible. So, what is God’s plan for His people in all of this? What message might He be sending? What message of hope can we provide to the rest of the unsaved world?

May I suggest we look at one example, among many others, in the Old Testament that is recorded in 2 Chronicles 7: 11-22. There, we see the covenant God made with Solomon and the warnings He gave his chosen people. God called them to obedience and purity in their worship and devotion to Him. They were to have no other gods of any manner, shape, size, type, or the like. Did they disobey? Yes, they did. They raised idols to false gods in high places. As a result of such disobedience God caused all types of suffering and distress to come upon the land. Because they sinned and became apostate, they suffered plagues and pestilence, they couldn’t travel ( sound familiar? ). They recovered only when they repented and purged the land of its detestable idols and once again worshiped and sacrificed to the true God. 2 Chronicles 15: 1-15.

I believe that we as His people and His Church need to purge any and all idols that may have crept into our lives. These idols are sinful and, in fact, all sin involves some form of idolatry. This pandemic has knocked out so much of what competes for our time and attention, such as sports, travel, entertainment, parties, dining out, and even work. Idols perhaps?

We now have a great opportunity to purge any and all idols that might have crept into our lives to distract us from our first love, the love of our Lord God. We also have a great opportunity to witness to our family, our friends, and all who God may put in our paths. Share the good news of the Gospel in the power of the Holy Spirit. Yes, John 3:16 is always a good place to start, but why not try the rich and comforting truths in Psalm 91. This Psalm is better than any anti-viral, vaccine, or remedy that man can manufacture.

“ WHOEVER DWELLS IN THE SHELTER OF THE MOST HIGH,

WILL REST IN THE SHADOW OF THE ALMIGHTY. I WILL SAY OF THE LORD

HE IS MY REFUGE AND MY FORTRESS, MY GOD, IN WHOM I TRUST.”

Psalm 91: 1-2.

BECAUSE HE LOVES ME, SAYS THE LORD, I WILL RESCUE HIM; I WILL

PROTECT HIM, FOR HE ACKNOWLEDGES MY NAME. HE WILL CALL

ON ME, AND I WILL ANSWER HIM; I WILL BE WITH HIM IN TROUBLE,

I WILL DELIVER HIM AND HONOR HIM.

WITH LONG LIFE I WILL SATISFY HIM AND SHOW HIM MY SALVATION.”

Psalm 91: 14-16.

EFA Endless Fro tier Act

POLICY

The Limit Does Not Exist

Francis Scialabba

This week, Senate Democratic Leader Chuck Schumer (D-NY), Sen. Todd Young (R-IN), Rep. Ro Khanna (D-CA), and Rep. Mike Gallagher (R-WI) unveiled the Endless Frontier Act (EFA).

I’m normally not in the business of covering laws, much less proposed ones. But EFA is an exception since it seeks to turbocharge American “discovery, creation, and commercialization of critical tech.” By that, the lawmakers mean every technology you read about in this newsletter.

EFA’s core proposals

Restructure the National Science Foundation into the National Science and Technology Foundation (NSTF)
In the NSTF, stand up a Technology Directorate that receives $100 billion over five years and operates like DARPA
Hand the Commerce Department $10 billion to invest across 10-15 regional tech hubs over five years

This is great news for U.S. universities and businesses, because EFA would pad R&D budgets, establish new scholarships, and create cutting-edge labs and fabrication plants.

What’s driving the frontier mindset?

As I wrote in the fall, the private sector overtook Washington in R&D investment four decades ago. EFA’s sponsors want to expand the pool of capital so that all of Washington’s tech priorities are advanced in the U.S.

The other reason for EFA, which its sponsors explicitly call out: China. While Beijing’s bid for tech supremacy is better described as a “slow burn” rather than a “Sputnik moment,” the country’s tech industrial base is now a true contender with the U.S. There’s more to come:

China plans to invest $1.4 trillion in emerging tech over the next six years.
Chinese chipmaker SMIC recently announced a $2 billion investment from state-backed funds.
Tencent will spend $70 billion on tech infrastructure over the next five years.

"The U.S. needs to pursue with all-of-the-above strategy and intensify efforts," a person familiar with the legislation told Emerging Tech Brew.

Bottom line: As Bill of Schoolhouse Rock’s “I’m Just a Bill” could tell you, EFA may never see the light of day. But adding $$$ to tech R&D and accelerating the U.S.-China tech decoupling are bipartisan priorities.

POLICY

The Limit Does Not Exist

Francis Scialabba

This week, Senate Democratic Leader Chuck Schumer (D-NY), Sen. Todd Young (R-IN), Rep. Ro Khanna (D-CA), and Rep. Mike Gallagher (R-WI) unveiled the Endless Frontier Act (EFA).

EFA’s core proposals

Restructure the National Science Foundation into the National Science and Technology Foundation (NSTF)
In the NSTF, stand up a Technology Directorate that receives $100 billion over five years and operates like DARPA
Hand the Commerce Department $10 billion to invest across 10-15 regional tech hubs over five years

This is great news for U.S. universities and businesses, because EFA would pad R&D budgets, establish new scholarships, and create cutting-edge labs and fabrication plants.

What’s driving the frontier mindset?

China plans to invest $1.4 trillion in emerging tech over the next six years.
Chinese chipmaker SMIC recently announced a $2 billion investment from state-backed funds.
Tencent will spend $70 billion on tech infrastructure over the next five years.

"The U.S. needs to pursue with all-of-the-above strategy and intensify efforts," a person familiar with the legislation told Emerging Tech Brew.

Friday, May 29, 2020

GE: For The 'Things Are So Bad They Can Only Get Better' Investor

May 27, 2020 11:41 AM ET 77 comments

Summary

The sale of the BioPharma unit deprives the company of one of its best businesses.

Heavy debt loads and an underfunded pension program continue to weigh on the company.

COVID-19 provides a number of formidable headwinds.

In 2017, I wrote 3 articles on General Electric (GE) to warn readers of the coming implosion of the company. I haven’t penned a piece on General Electric since. Why? Because watching the company has been akin to viewing a truck, stuck axle-deep in mud, spinning its tires.

One could argue the stock serves as a decent trading vehicle, but for over two years, describing GE as an investment is an insult to the English language.

Nonetheless, I’m in constant search for bargains, so I conducted an in-depth investigation of the firm. A great deal of money can be made when a troubled company turns around.

I don’t believe a turnaround is a near-case scenario for GE. For years, the company has struggled with debt and pension burdens. Now COVID-19 provides a new wave of headwinds.

I fear bad news has arrived, and despite management’s best efforts, the sins of the past still weigh on the company.

New Headwinds Abound

Management cut the dividend (twice), divested a number of the company’s businesses and slashed jobs by the thousands in an effort to revive GE. One of those divestitures was the recent deal to sell GE’s BioPharma business to Danaher (DHR) for $21.4 billion.

I believe the sale of the BioPharma unit illustrates the obstacles on GE’s road to recovery. It is understandable when companies sell businesses that do not mesh with the larger enterprise. It makes sense to divest a business when a corporation is moving to a business model that a segment does not match.

Neither of those scenarios describe the deal with Danaher.

The Biopharma unit racked up $1.3 billion in FCF the year before it was sold. The proceeds from the sale were earmarked to reduce GE’s ponderous debt. Unfortunately, those funds may be needed to buttress the company against headwinds brewing from COVID-19.

The chart below details the revenues and FCF generated by GE’s five segments. The numbers provided are prior to the loss of revenues from BioPharma.

Source: GE Presentations/Chart by Author

(* FCF of Capital Segment includes Corporate and Eliminations)

Following that deal, we are left with three segments that are FCF negative, plus the healthcare segment, with FCF that has been cut by more than half, and Aviation.

Aviation generated nearly 80% of FCF in 2019 (excluding BioPharma’s contribution). But last year’s results weren’t impacted by COVID-19.

GE is the sole supplier for 737 Max engines, and the grounding of Boeing’s (BA) 737 Max resulted in losses of roughly $1.4 billion in 2019. Management projects additional losses of $400 million per quarter until the 737 Max is back in production.

The coronavirus’ effect on the airline industry will likely last longer and have a more profound effect. You can get some idea of the severity of the problem by reviewing the slowing demand at Boeing and Airbus (OTCPK:EADSY).

Through the first three months of 2020, Boeing delivered 50 commercial aircraft. That compares to 149 during the same period in 2019 and represents the lowest number since 1984.

Meanwhile, Airbus reduced its commercial aircraft production markedly.

GE is the number one supplier of new jet engines. In normal times, that’s a strength. However, when less than 40% of the global airline fleet remains in service, that becomes an acute liability.

"The deep contraction of commercial aviation is unprecedented, affecting every customer worldwide."

GE Aviation CEO David Joyce

There is a silver lining for GE, but not in the immediate future. Airlines will restrain capex, and fewer new aircraft means more maintenance.

GE uses new engines as a loss leader to fuel revenues in the segment’s service offerings. GE engines power roughly two thirds of every commercial aircraft. In turn, the servicing of aircraft drives nearly two thirds of the Aviation’s revenues, so fleets with older aircraft serve as a tailwind.

Unfortunately, the Aviation segment isn’t the only arm of the company adversely hamstrung by troubles plaguing the airline industry. GE Capital is affected through GECAS. GECAS is the globe's number one lessor and lender for commercial aircraft and engines.

Technically, lease rates should remain the same due to the contract terms between GECAS and the airlines. However, the reality is that GECAS will be forced to adjust the lease terms to support their customers. After all, a client paying a reduced lease provides more revenue than one driven to bankruptcy.

The crisis will drive lease rates down, and that will result in depressed revenues for an extended period.

The following chart illustrates the differing lending branches within GE Capital.

Source: Metrics from GE Presentations/ Chart by Author

As previously noted, GE Capital had negative FCF prior to the COVID-19 crisis. The segment has tallied losses for five consecutive years. With this blow to GECAS, the pain can only worsen.

Perhaps a hint at the potential losses can be found in management's decision to cut 13,000 jobs, 25% of the Aviation segment’s workforce. Ominously, management stated the workforce reduction will be permanent.

The Baker Hughes Conundrum

For years, GE planned the divestiture of its stake in Baker Hughes (BKR). A stockholder’s agreement prohibited GE from selling the position in Baker Hughes in a wholesale fashion, and the enormous stake GE held in BKR presented difficulties in terms of selling the shares on the open market.

The steep decline in oil prices means shares of Baker Hughes trade for roughly one fourth of what the stock sold for three years ago. Management’s goal was to sell the position in Baker Hughes and use the funds to pay down debt.

The company previously stated plans to divest its remaining position in BKR would result in a loss of $8.4 billion, but that was when the shares stood at $23.57. Today the stock trades below $16.

“The only man who sticks closer to you in adversity than a friend is a creditor.”

Anonymous

Despite the many steps management has made to reduce GE’s debt, the company’s debt-to-equity ratio stands four to five times higher than many of its peers. The debt burden prompted S&P to join Fitch in providing a negative credit outlook for the firm.

GE’s credit ratings now stand at Baa1 stable (Moody’s) and BBB+ negative, for S&P and Fitch.

This means GE’s debt is three notches above junk and is in danger of being downgraded.

The Elephants In The Room

Fitch also considers GE to be one of the long-term care insurance providers at greatest risk. In a recent report, Fitch stated GE has high exposure to claims and slender cash reserves devoted to their insurance offerings. The report also noted GE’s “very high” risk related to 250,000 retirees that depend on the company’s policies.

Harry Markopolos, a financial investigator, contends GE long-term care policies are underfunded by $29 billion.

There are reputable sources that seek to refute those claims. Goldman Sachs and Reuters see GE’s reserves as in line with peers.

This following, however, is not in dispute: General Electric’s pension deficit is the worst in corporate America. As I’m writing this article, GE’s market cap is a hair over $56 billion. At the end of 2018, the company had a total pension liability of $92 billion and plans were underfunded by $22 billion.

It is important to note that Danaher will assume the pension obligations related to the BioPharma deal.

Dividend And Valuation

GE has a current yield of .62%. The payout ratio is approximately 15%. Despite the low payout ratio, I think it is possible we will see a dividend cut to preserve cash.

As I type these words, GE trades for $6.41 a share. The average 12-month price target of 15 analysts is $9.68. The average target of the 5 analysts rating the company in the last 30 days is $7.70.

The current PE is 10.45 and the forward PE is 15.99.

My Perspective

I could spend another 1500 words writing on additional headwinds as well as the few positives surrounding an investment in GE. However, I hope I’ve provided a balanced view regarding the tremendous obstacles facing GE management.

I rate GE as a SELL.

This is the first time in 112 SA articles that I have recommended investors sell a stock. I readily admit that a turnaround in GE is possible. If that occurs, shareholders could be richly rewarded. However, the headwinds are formidable and may be long-lasting. Furthermore, the current market offers a proverbial target-rich environment of companies worthy of investment.

One Last Word

I hope to continue providing articles to SA readers. If you found this piece of value, I would greatly appreciate your following me (above near the title) and/or pressing “Like this article” just below. This will aid me greatly in continuing to write for SA. Best of luck in your investing endeavors.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have no formal training in investing. All articles are my personal perspective on a given prospective investment and should not be considered as investment advice. Due diligence should be exercised and readers should engage in additional research and analysis before making their own investment decision. All relevant risks are not covered in this article. Readers should consider their own unique investment profile and consider seeking advice from an investment professional before making an investment decision.