Warnings Are More Valuable to Investors Than Good Ideas
(Bloomberg View) -- I have learned a number of things during my long tenure on Wall Street. One is that the velocity of losses is much greater than the velocity of gains. Profits are generally eked out and losses are generally potholes that can quickly swallow you whole. Consequently, warnings are far more valuable than decent ideas. Today is a day for warnings.
Take General Electric Co., which on Tuesday disclosed a larger-than-expected $6.2 billion charge related to an old portfolio of long-term care insurance and that it’s weighing a possible spin-off or other ways to maximize the value of its power, aviation and healthcare units. Here is a mainstay company, for both equity and debt investors, that has put itself in play. I am somewhat concerned, as the outcomes may prove to have one effect for GE’s equity holders, and the opposite for bond holders.
Bloomberg puts GE’s debt-to-assets ratio at 37.3 percent and the debt-to-common equity ratio at 179.6 percent. These are not insignificant numbers. My focus is on the bond side of the equation. Any break-up, with multiple scenarios possible, could have a very real effect on GE’s bonds and their credit ratings. My issue is what might happen to GE’s debt if spin-offs take place. Which entity would be responsible for what debt?
“I would categorize it as an examination of options and it’s (the) kind of thing that could result in many, many different permutations, including separately traded assets really in any one of our units, if that’s what made sense,” Reuters quoted GE Chief Executive Officer John Flannery as saying.
I consider Europe to also be in play. The politicians on the Continent will inform us, in vast numbers, that nothing of the sort is the case, but I will take the minority position. The problems in Catalonia are quite real and significant, in my opinion. They, however, play second fiddle to what is happening in Italy leading up to March 4, when the Italians will have their national elections.
“The election signals the return of serious political risk to the euro area’s third-largest economy, which has a debt stock of around 2.3 trillion euros ($2.77 trillion) -- by our estimate, 133 percent of gross domestic product (GDP) in 2017, and over 20 percent of the euro-area total,” Peter Ceretti, an analyst at the Economist Intelligence Unit, stated on Tuesday.
I place little significance on the polls in Europe. You may remember the Brexit projections, but Termometropolitico released a poll on Jan. 11 that suggested Italy’s Five Star Movement is the most likely to win the election, with 29 percent of the vote, followed by Matteo Renzi’s Democratic Party with 24 percent of the support and former Prime Minister Silvio Berlusconi’s Forza Italia with 15.3 percent.
Euro skepticism marks both the Five Star Movement and Berlusconi’s group. It is impossible to know how this would exactly play out, but serious political risk is once again on the table for Italy, and the entire European Union construct, as a possible result of the elections. Many currently favor European investments, but I do not. I view the political risk as real and serious. I am also not an investor in Italian or Spanish or any European banks, for that matter. Ratings firm S&P Global Ratings said Tuesday that it sees downside risks for Italian banks. They were being polite, in my view.
The ruse that was recently played out on big bond holders in Spain and Italy, where bonds were “mis-sold” to local investors was nothing short of fraud, in my estimation. The institutions that owned the bonds took massive losses while the Spanish and Italian locals got all of their money back. I do not invest with people and governments where the rules are made up as you go along for the benefit of the issuers and to the detriment of the bond holders. Spain and Italy, in my opinion, quite literally voided the indentures for their own political purposes while the European Central Bank and EU placidly went along with the local decisions.
They have shown their true colors, and I have gotten the joke. If they can do this with bank bonds, then they can do it with other bonds. If they can do it in two countries, then they can do it in other countries. The value of fundamentals fades when illegal activities are ordained by the ruling authorities.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mark Grant is a managing director and chief global strategist at the investment bank B. Riley FBR Inc.
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